Bank of Canada interest rate forecast report March 2021

Key findings

• • • Nearly two in five (38%) economists think Bank should provide clearer guidance
    • About half of economists (52%) believe the rate will hold for two or more years
    • Half the experts predict more than 80% of Canadian SMBs will survive the pandemic
    • Nearly three quarters of economists (70%) believe economic reopening will be delayed due to vaccine setbacks as compared to other comparable countries
    • Housing forecasted to increase an average of 5% in six months time

  Expert forecasts ahead of the March decision

  • Sebastien Lavoie
  • Moshe Lander
  • Lars Osberg
  • Tony Stillo
  • Murshed Chowdhury
  • Derek Holt
  • Philip Cross
  • Carl Gomez
  • Craig Alexander

  

  Sebastien Lavoie

  Chief economist, Laurentian Bank

  Hold

  “There has been too much talk about the micro-cuts earlier in 2021, particularly since confidence improves relative to the outlook. Furthermore, the pass-through of changes in the policy rate near the zero bound is more limited as shown in Scandinavian countries, making the case for an indeed lower bound than 0.25% not very meaningful in the grand scheme of things.”

  

  Moshe Lander

  Professor of economics, Concordia University

  Hold

  “I have long pushed for the Bank to go below its perceived effective lower bound, but the reality is that even were it to do so, there is limited scope for it to go lower. Financial markets understand that an extra 0.1 or even 0.25 off the target overnight rate is not going to make more than an incremental difference to the economy, so as long as the Bank is not signalling an increase in rates, then it is not really an issue.”

  

  Lars Osberg

  Professor of economics, Dalhousie University

  Hold

  “[No, The Bank does not need to provide further guidance], as it makes little real difference.”

  

  Tony Stillo

  Director of economics for Canada, Oxford Economics

  Hold

  “We do not believe the Bank of Canada should have implemented a ‘micro-cut.’ Still, we think the Bank should more clearly communicate how much lower the effective lower bound can go (if need be), especially in light of their earlier research that determined it is below zero, likely -0.5% in Canada.”

  

  Murshed Chowdhury

  Associate professor, University of New Brunswick

  Hold

  “A micro-cut of the policy interest rate is feasible; however, it’s unlikely to act as a stimulus. Yes, better forward guidance is good to reduce uncertainties, but the economic scenarios are excessively dynamic during this COVID regime. The room for the Bank in terms of a micro-cut in the rate to stimulate the economy is limited and better forward guidance in that regard would be unlikely to have any significant impact on economic aggregates. The Bank would rather pay attention to the quantitative easing and unconventional policies to reduce the long-term borrowing cost.”

  

  Derek Holt

  Vice president and head of capital markets economics, Scotiabank

  Hold

  “The recovery period makes it [forward guidance] somewhat moot for a time, but to restore credibility, the BoC will have to review its ELB guidance. They have changed it to the point to which they will have difficulty convincing markets about the ELB in future shocks.”

  

  Philip Cross

  Senior fellow, Macdonald-Laurier Institute

  Hold

  “Increasingly, the market is dictating to the Bank what interest rates will be, not the reverse.”

  

  Carl Gomez

  Chief economist and head of market analytics for CoStar Group

  Hold

  “Slow vaccine distribution has stalled progress in Canada’s ability to mass vaccinate, suggesting that the economy may continue to experience near-term pain as potential lockdowns and restrictions on consumers and businesses are likely to persist over the near term. As a result, the transition from re-opening the economy to full recuperation may be somewhat elongated and volatile before mass vaccinations allow economic growth to return more forcefully by the end of 2021.”

  

  Craig Alexander

  Chief economist and executive advisor, Deloitte

  Hold

  “More clarity is always welcome, but the BoC is not required to be explicit about its intent or plans. The market often puts excessive weight on selected comments. This is why Governor Poloz opted to rewrite the communique from scratch each time, so the market could not parse each sentence.”

  • Sherry Cooper
  • Angelo Melino
  • Atif Kubursi
  • Sri Thanabalasingam
  • Hubert Marleau
  • Brett House
  • Eldar Sehic
  • Avery Shenfeld

  

  Sherry Cooper

  Chief economist, Dominion Lending Centres

  Hold

  “I think Macklem has been very clear. No further cuts in overnight rates.”

  

  Angelo Melino

  Professor, University of Toronto

  Hold

  “[Yes, the Bank should provide more clarity on forward guidance] A few years ago, the Bank announced an effective lower bound of minus 50 basis points. In spring 2020, the Bank decided that it was 25 basis points, but never provided any research or discussion for its reversal.”

  

  Atif Kubursi

  President, Econometric Research Ltd

  Hold

  “Well, there is so much uncertainty in the global and national economies that will make any assertion by the BOC about its future stance meaningless. The pandemic is still raging, supply chains remain broken, new variants and lockdowns are still possible. This is time for BOC to leave itself wiggle room and not to take an inflexible position that it cannot maintain.”

  

  Sri Thanabalasingam

  Senior economist, TD Bank Group

  Hold

  “By hinting that the effective lower bound could be lower than 0.25%, the Bank of Canada introduced uncertainty to its communication. For forward guidance to be completely effective, there should be little to no uncertainty in the Bank’s communication.”

  

  Hubert Marleau

  Market Economist, Palos Management

  Hold

  “[The Bank does not need to clarify forward guidance] – surprises are better than expectation.”

  

  Brett House

  Deputy chief economist, Scotiabank

  Hold

  “Forward guidance needs to be read in tandem with the Bank staff’s forecasts. Given that vaccines have arrived earlier than anticipated by the Bank and the economy is doing a bit better than forecast, the combined implications of the Bank’s guidance and forecasts is clearer than either of those pieces alone.”

  

  Eldar Sehic

  Professor of economics, The University of Victoria

  Hold

  “More clarity [from the Bank] and resilience in the financial markets would augment the economy’s recovery and growth.”

  

  Avery Shenfeld

  Managing director and chief economist, CIBC

  Hold

  “We will have a month or two lag in reaching the same level of vaccinations as the US, and that will translate into a delayed restart to some types of economic activity.”

  The March 10 decision

  Since the beginning of the pandemic, when the rate underwent an emergency cut in March 2020, the Bank of Canada has maintained that .25% would remain the effective lower bound.

  However, in a speech given by Deputy BoC Governor Paul Beaudry in December, he noted that if things “take a more persistent turn for the worse” the Bank’s options would include “reassessing the effective lower bound, which would allow for the possibility of a lower – but still positive ­– policy rate.”

  Beaudry’s comments, coupled with more recent rumblings that Canada’s economic recovery may be swifter than the Bank of Canada anticipated in some of its recent remarks, have economists asking whether we should be receiving more clear forward guidance from the Bank.

  Does the Bank owe us further guidance?

  When we asked our panel of economists if the Bank of Canada should be more clear with forward guidance, opinions were split. While a little over half (52%) of our economists believe the BoC doesn’t owe Canadians more clear forward guidance, another 38% believe they do deserve more clarity, while a small minority (10%) of panellists were unsure.

  Of the experts who believe the Bank of Canada should provide more clear guidance, common themes are a swifter than expected economic recovery and concerns around maintaining transparency and credibility.

  Derek Holt, head of capital market economics for Scotiabank, admits “the recovery period makes it [forward guidance] somewhat moot for a time, but to restore credibility, the BoC will have to review its ELB guidance. They have changed it to the point to which they will have difficulty convincing markets about the ELB in future shocks.”

  Sri Thanabalasingam, senior economist at TD Bank, echoes Holt’s belief that it’s the Bank’s duty to be as clear as possible as a general rule.

  “By hinting that the effective lower bound could be lower than 0.25%, the Bank of Canada introduced uncertainty to its communication. For forward guidance to be completely effective, there should be little to no uncertainty in the Bank’s communication.”

  Angelo Melino, professor at the University of Toronto, also believes the Bank hasn’t been as clear as they were in the past.

  “A few years ago, the Bank announced an effective lower bound of minus 50 basis points. In spring 2020, the Bank decided that it was 25 basis points, but never provided any research or discussion for its reversal.”

  Of those that believe the Bank does not owe Canadians any further guidance, many think it wouldn’t make much of a significant difference at this point.

  Philip Cross, senior fellow at the MacDonald-Laurier Institute, thinks that in these uncertain times, “Increasingly, the market is dictating to the Bank what interest rates will be, not the reverse.”

  Sherry Cooper, chief economist for Dominion Lending Centres, is taking The Bank of Canada at face value, “I think Macklem has been very clear. No further cuts in overnight rates.”

  Atif Kubursi, president of Econometric Research, highlights the global economic uncertainty that would render more solid guidance unnecessary.

  “Well, there is so much uncertainty in the global and national economies that will make any assertion by the BOC about its future stance meaningless. The pandemic is still raging, supply chains remain broken, new variants and lock-downs are still possible. This is time for BOC to leave itself wiggle room and not to take an inflexible position that it cannot maintain.”

  Finally, Craig Alexander, chief economist for Deloitte, said he was unsure whether further forward guidance would be necessary.

  “More clarity is always welcome, but the BoC is not required to be explicit about its intent or plans. The market often puts excessive weight on selected comments. This is why Governor Poloz opted to rewrite the communique from scratch each time, so the market could not parse each sentence.”

  Economic outlook

  Despite any confusion around what the “effective lower bound” may be, when we asked our panel of experts if the next rate move would be “up” or “down,” only 1 out of 20 believed it would dip lower. The remaining 19, or 95% of panellists, believe the next rate move would be up.

  While almost uniformly predicting that the next rate move will be upward in this survey, the question of WHEN the rate will rise again shows a shift in the panel’s perception from the last Bank of Canada survey in January.

  About half of economists (52%) believe the rate will hold for two or more years, this marks a shift in sentiment from our last Bank of Canada report when more than two-thirds of economists (69%) believed the rate would hold for two or more years. Only 15% believe the rate will remain for 3+ years as compared to 31% last report.

  Delays in COVID vaccine to slow economic recovery

  Nearly three-quarters (70%) of panellists believe that the delays with the vaccination schedule will result in Canada equally delaying its economic reopening compared to other developed nations. Philip Cross says all you have to do is turn on the TV to see what’s going on around the world to view the impact the delay is having.

  “We are already seeing this. People are returning to sports and entertainment venues in the US, while we sit stewing at home.”

  Lander believes that delay in the distribution of the vaccine has an exponential effect on the ability of the economy to recover.

  “The economy cannot return to anything resembling its pre-pandemic self without confidence that the virus has been contained and that it is safe for people to return to their jobs, for consumers to return to their various places of custom and for the borders to open. The fact is that each month that the vaccination plan is delayed adds more than a month on the back end because of the hysteresis that the last year of damage has left in its wake.”

  Deputy chief economist at Scotiabank, Brett House, sits on the other side of the coin and thinks that Canada is on track to make a recovery, even with the slow rollout of the vaccine.

  “Canada’s recovery is already well advanced in many sectors and we anticipate that the Bank of Canada will be one of the earliest OECD central banks to begin normalizing monetary policy,” he said.

  What does the future hold for Canada’s SMEs?

  While it’s been a bleak time for small and medium businesses around the globe, half (50%) of our panel believe that 80% of SMEs will survive the pandemic. Sebastien Lavoie, chief economist at Laurentian Bank, and Craig Alexander are two of the most bullish panellists, both of whom think that 90% of SMEs will survive the fallout from COVID-19.

  For Lavoie, while he acknowledged the pandemic has devastated a number of SMEs, those businesses most impacted are those reliant on physical services, and with the possibility of reopening on the horizon, the future of those businesses is yet to be written.

  “Surveys indicate an unusually large proportion of SMEs are on the verge of closing. Although the impact is concentrated in services tied to close physical proximity. It is unclear if it will affect long-term potential as new companies take shape,” he said.

  The least bullish member of our panel is chief economist for CoStar Group Carl Gomez, who thinks that 50% of SMEs could be in serious trouble.

  “Many of these small to medium-sized businesses have very little working capital. Although government programs have given them a short-term lifeline, a sharp increase in business is probably needed sometime soon for them to actually operate on their own.”

  Housing price predictions for late summer

  Finder asked our panellists to assign a percentage value for any anticipated price increases or decreases in 10 of Canada’s major markets. We averaged out the responses and ranked them below from most anticipated to increase in value to least.

  The 13 panellists forecasted an average increase of 5% in 6 months’ time (late summer), 3 points more than what was forecasted in the January BoC report.

  Hamilton is in the lead for the highest anticipated increases (7%), with Toronto next with an anticipated 6% increase. Other major markets like Vancouver, Montreal and Ottawa are in line with the national average forecast at 5% increases each. Winnipeg, Calgary and Edmonton are just predicted to see a 3% increase each.

  House believes “Canada’s major cities continue to face a strong under-supply of residential real estate compared with population-adjusted demand. With immigration set to return to more normal flows in 2021, this imbalance is set to become more pronounced.”

  Still, while low supply and increased immigration may continue to send prices higher, there is also the issue of continued government stimulus contributing to rapid inflation in housing and other asset classes (e.g. stock market).

  Lander believes inflation and government stimulus will see real estate prices inflated until at least summer 2021.

  The government has pumped billions of dollars into the economy yet inflation remains subdued. That money has to be showing up somewhere, though, and its effects are clearly seen in the financial markets and housing markets. A post-pandemic correction is clearly needed and coming, but it will not begin before the end of the summer.

  Carl Gomez believes the trend of increased virtual work and the subsequent desire for more space will continue to drive price growth outside denser urban centres.

  “Residential real estate is likely to see continued strong demand and resulting price growth, particularly in suburban and exurban areas as potential homebuyers look for more space. Many potential homebuyers have significantly ramped up savings through the pandemic while rock bottom interest rates provide the fuel for further price gains.”

  Most of our experts agree that factors like record-low interest rates, high savings rates and low supply of single family homes in big cities are bolstering the real estate market. They also predict some ongoing price depreciation in the condo market.

  Tony Stillo predicts, “… condo apartments are likely to see prices fall 0.7% on average this year, more so in big cities, while prices for single detached homes are expected to rise 9.6% in 2021.”
  Cross agrees, “… cities with large downtown condo markets will continue to lag as people shift to outlying areas but the recent rebound in oil will help Calgary.”

  Commercial real estate in Canada’s “transit cities” will face challenges

  Recent studies find commercial real estate in cities where most workers commute by car have been less affected by the pandemic than those in major cities where more workers take transit.

  When we asked our panel of economists if they think this phenomena will continue to cause economic challenges in these so-called “transit” cities (i.e. Toronto, Montreal and Vancouver), they overwhelmingly said it would. In fact, 44% of respondents said it was “very likely” and another 50% said it was “likely” commercial real estate will face challenges in Canada’s largest transit cities.

  Lavoie believes the pandemic has been the turning point for workers previously based in busy downtown offices.

  “COVID marked the permanent disruption of the typical 9-to-5 traditional work day implying long commutes to downtown areas. Surveys suggest a mix of days at the office and at home. Teleworking saves time and money for both employees and employers.”

  Cross agrees with the idea of a permanent shift from big cities saying, “Some people think downtowns will come roaring back, as after past pandemics. But I think technology is different this time. People did not buy all that real estate in the country and suburbs just to turn around and return downtown.”

  Gomez believes with the ongoing health concerns of the pandemic that older buildings with poor ventilation won’t be attractive to potential tenants even when they are ready to return to the office, which “could cause moderate rent reductions in these older buildings.”