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Bank of Canada interest rate forecast September 2020

Finder's 20 economists all correctly predicted the Bank of Canada would hold the overnight rate at .25% on September 9, 2020.

Key findings

  • Only 20% of panellists think the rate will move before 2022
  • Three quarters (73.7%) of economists think negative rates aren’t in the cards
  • Only half (50%) of economists see CERB transition to new benefits as sufficient
  • Only 11% of economists view housing affordability as positive and see moderate average growth (3%) in residential housing values
  • Property experts raise serious concerns about the future of commercial real estate and large urban centres

Expert forecasts ahead of the September 8 decision

James Knightley panelist
James Knightley
Chief International Economist, ING

Hold

“[The Bank has a] lack of enthusiasm for negative rates and while inflation is low now, it will likely trend gradually higher, thus moving into the lower range of the [Bank’s] preferred 1-3% range.”
Carl Gomez panelist
Carl Gomez
Professional Economist and Real Estate Strategist

Hold

“The BoC would be cautious about the moral hazards that would develop from unconventional policies. They would be more apt to ultimately adopt greater flexibility in conventional policies such as looser inflation targeting.”

Moshe Lander
Professor, Concordia University

Hold

“Fiscal policy is constrained under a flexible exchange rate system. The government has already spent an exorbitant amount and is facing political constraints as well as economic constraints. The Bank of Canada will need to pursue aggressively any and all policies to stave off deflation and to give a boost to demand to keep the economy from seizing up if and when the second wave comes in the autumn.”
Lars Osberg panelist
Lars Osberg
Professor of Economics, Dalhousie University

Hold

“In 2021 we are likely to see a bust, but for now there is a mini-boom as affluent households shift their portfolio to real assets (i.e. housing) & away from uncertain stocks & puny bond yields.”
Tony Stillo
Director of Economics for Canada, Oxford Economics

Hold

“The Bank is not expected to employ negative rates. Rather it has fully embraced QE as a monetary policy tool. Elevated uncertainty regarding the economic outlook due to the pandemic will likely see the Bank continue growing its balance sheet to support the recovery until a health solution arrives.”
Murshed Chowdhury
Associate Professor, University of New Brunswick

Hold

“The Bank of Canada is likely to hold the interest rate at the effective lower bound until the economic downturn is absorbed to a certain level, similar to the Fed. As the economy is rebounding, it would be better for the Bank to give a signal to the stakeholders that there is policy certainty from the Bank’s side. Further changes are likely to create uncertainty among citizens as many of them are not familiar with the negative rate. If needed, the Bank should be able to expand/initiate the unconventional/unusual policies they have adopted in the first quarter in response to the pandemic.”
Derek Holt
Vice President & Head of Capital Markets Economics at Scotiabank

Hold

“The BoC has ruled out negative rates and narrowed its QE focus to buying Federal government bonds for an extended period. This will continue to provide ongoing stimulus absent further moves.”
Helmut Pastrick panelist
Helmut Pastrick
Cheif Economist, Central 1 Credit Union

Hold

“[The Bank] will focus on] more QE before going negative.”
Dr. Vik Singh panelist
Dr. Vik Singh
Assistant Professor, Ryerson University

Hold

“We are quite vulnerable to the downturn in the US economy and will see a possible impact on other sectors in the coming months other than retail and hospitality that have suffered so far. This creates a huge risk for the economy and the allocated benefits will not resolve the problem.”
Sebastien Lavoie panelist
Sebastien Lavoie
Chief Economist, Laurentian Bank Securities

Hold

“The current QE purchases are efficient in fostering market functioning and helping the recovery. Also, the new governor just put in place forward guidance tied to the 2% inflation target. Thus, using unconventional tools in the next 12 months will depend on the path of the recovery tied to our ability to control the virus. Under a positive scenario, the BoC is likely to carry on with a moderate pace of asset purchases. Under a severe scenario, the lending for credit tool could be useful to allow credit activity. The ECB lent at at negative rates to banks earlier this summer, conditional on banks passing on to households and business loans.”

Sherry Cooper
Chief Economist, Dominion Lending Centres

Hold

“The Bank has stated repeatedly that the overnight rate is already at its effective lower bound. They will continue to purchase bonds–quantitative easing.”
Angelo Melino panelist
Angelo Melino
Professor of Economics, University of Toronto

Hold

“I don’t expect negative interest rates, but as the economy starts to improve in 2021 I expect the Bank will return to forward guidance to keep the yield curve from steepening too quickly.”
Hubert Marleau panelist
Atif Kubursi
President, Econometric Research

Hold

“There is so much uncertainty about the future, the pandemic is not subsiding and government finances are strained to the limit. It is not reasonable to expect that any new stimulus is likely. The interest rates are rock bottom and not much can be expected from lower interest rates. The real constraint now is an economy mired in a recession that could develop into a depression if governments start retreating from stimulating the economy.”
Sri Thanabalasingam
Senior Economist, TD Bank Group

Hold

“Current inflation readings are backward looking. The significant stimulus measures the Bank has already taken to support the economy will show up in future price increases. We expect current policy moves will take inflation back to the target over the next 12 months.”
Avery Shenfeld panelist
Avery Shenfeld
Managing Director and Chief Economist, CIBC

Hold

“The Bank of Canada has already emphasized that rates are at their ‘effective lower bound’. Negative rates are very unlikely but ‘other unconventional policies’ might be possible.”
Roelof Van Dijk panelist
Roelof Van Dijk
Director of Market Analytics & Market Economist, Canada, CoStar Group

Hold

“We believe that despite high unemployment, which is usually deflationary, rising costs of delivering goods and services (not even considering potential onshoring of production) will result in higher inflation than we are currently experiencing. Furthermore, we do not believe the BoC will go to negative interest rates but will likely continue utilizing unconventional policies to stimulate the economy.”
Doug Porter panelist
Doug Porter
Chief Economist, BMO Financial Group

Hold

“No to negative rates, but I suspect that they will attempt something unconventional to support the recovery (beyond what they have already done).”

The Bank of Canada continues to imply the overnight rate will hold while Canada’s economy remains in crisis due to COVID-19. Due to the bank’s steadfast position that rates will remain at .25%, Finder’s panel of 20 economists and industry experts all correctly predicted the rate hold on September 9 and see it holding, very likely for the foreseeable future.

The economic shutdowns, and more recently the gradual reopening of Canada’s economy, has been happening for nearly six months and with the global pandemic not showing significant signs of slowing this recession may stretch on longer than initially anticipated.

This is why it is no surprise that when we asked our panellists how long they thought the rate would hold at what is effectively zero, the time horizon for a change got much longer than it was a few short months ago. In fact, 95% of our economists now believe the rate will hold at .25% for longer than a year, compared with 81% in the July BoC report.

However, what is really astounding is that now 80% of economists don’t see the rate moving until some point in 2022 or 2023, compared to only 40% in our June BoC report, this doubling of the predicted time horizon for a rate change speaks to the rapidly evolving nature of this recession in Canada.

Atif Kubursi, president of Econometric Research, elaborates on these uncertain times and emphasizes there could be negative long-term consequences of relying too heavily on rock-bottom interest rates to stimulate the economy.

“There is so much uncertainty about the future, the pandemic is not subsiding and government finances are strained to the limit. It is not reasonable to expect that any new stimulus is likely. The interest rates are rock bottom and not much can be expected from lower interest rates. The real constraint now is an economy mired in a recession that could develop into a depression if governments start retreating from stimulating the economy.”

Economic Outlook

Canada’s inflation rate has only increased marginally in July (.1%) and is currently under 1% (year over year). The Bank likes to see inflation between 1% and 3% and if under these levels it typically turns to cutting interest rates to stimulate the economy.

With that in mind we asked our economists, considering interest rates are already at record lows, how likely is it the Bank will adopt either negative interest rates or other unconventional policies to stimulate the economy in the next 12 months.

Nearly three quarters, (74%) think it is either unlikely or very unlikely that the Bank would explore negative rates or unconventional policies, most citing continued quantitative easing being the far more likely option.

Derek Holt, Head of Capital Markets Economics at Scotiabank explains “The BoC has ruled out negative rates and narrowed its QE focus to buying Federal government bonds for an extended period. This will continue to provide ongoing stimulus absent further moves.”

Murshed Chowdhury, Associate Professor at the University of New Brunswick also thinks negative rates are unlikely.

“The Bank of Canada is likely to hold the interest rate at the effective lower bound until the economic downturn is absorbed to a certain level, similar to the Fed. As the economy is rebounding, it would be better for the Bank to give a signal to the stakeholders that there is policy certainty from the Bank’s side. Further changes are likely to create uncertainty among citizens as many of them are not familiar with the negative rate. If needed, the Bank should be able to expand/initiate the unconventional/unusual policies they have adopted in the first quarter in response to the pandemic.”

Moshe Lander, professor at Concordia University, takes the contrary view asserting more must be done to stimulate the economy.

“Fiscal policy is constrained under a flexible exchange rate system. The government has already spent an exorbitant amount and is facing political constraints as well as economic constraints. The Bank of Canada will need to pursue aggressively any and all policies to stave off deflation and to give a boost to demand to keep the economy from seizing up if and when the second wave comes in the autumn.”

Angelo Melino, professor at University of Toronto, says “I don’t expect negative interest rates, but as the economy starts to improve in 2021 I expect the Bank will return to forward guidance to keep the yield curve from steepening too quickly.”

CERB Transition

The Federal Government recently announced that it will be providing 37 billion for the transition from CERB at the end of September. This money is allocated for a variety of extended benefits ranging from improvements to EI, a weekly benefit of $400 for workers (for up to 26 weeks) who don’t qualify for EI, a $500 weekly caregiver benefit for those who must stay home due to a lack of childcare and two weeks of sick leave ($500 a week) for those affected by COVID-19.

We asked our panellists if this transition from CERB to these new benefits will be sufficient enough to improve the financial situations of Canadians struggling due to the economic fallout of COVID-19. While opinions are split exactly half (50%) believe this transition will be successful. 39% believe they won’t be fully sufficient with another 11% undecided.

Craig Alexander, Partner and Chief Economist at Deloitte, believes that the CERB could not go on as it was structured and asserted, “the benefits needed to be scaled back.”

Avery Shenfeld, Managing Director and Chief Economist at CIBC Capital Markets believes this move will be a positive for workers, stating, “while base benefits are a bit lower than they were under CERB, there are more opportunities to earn labour income while retaining these benefits.”

Agreeing with Shenfeld is Tony Stillo, Director of Canada Economics at Oxford Economics, who goes further to say, “Canada’s fiscal measures will provide ongoing support for displaced workers as a result of the pandemic, including measures to reduce the disincentive to return to work with the CERB.”

Sebastien Lavoie, Chief Economist at Laurentian Bank believes benefits and supports for workers are essential to support Canada’s economy and worries, “Smaller checks from the federal government could slow the pace of the recovery…More income support from governments, even if it leads to credit downgrades, is a small price to pay in the grander scheme of things.”

Stay at home mothers career progression may be in jeopardy

More than half of economists (56%) are in favour of schools reopening based on current risk models, with only 17% of economists thinking schools should remain closed.

Chief Economist at BMO Financial Group Doug Porter believes schools need to reopen as their closure is putting too much of a burden on the economy, “Ongoing school closures are simply too big a drag on the economy to be sustainable.”

However, Atif Kubursi says that health and safety should be the priority right now and not the economy:

“Safety concerns should prevail here. Children will be exposed to higher rates of infections which could infect parents and wage earners. We need to bite the bullet and look for alternative methods of teaching the children until a vaccine proves its effectiveness. There are costs indeed to suspended learning and parenting but health costs could exceed these and will show up in lower productivity of the future generations.”

One of the major impacts that school closures is having is on working mothers, particularly millennials. Over half of the economists (56%) say that the mothers, of young children especially, could see their career stall or reverse as a result of the pandemic.

Murshed Chowdhury highlights that school closures are unduly affecting working mothers as opposed to working fathers.

“Having a child and working from home is very challenging. Working mothers taking more time off to prioritize childcare is different than what we are currently going through. The statistics already revealed that the negative impact on the female labour force is more severe than their counterpart. It’s even more difficult for working mothers.”

As to whether the current situation will have a lasting impact on young mothers’ careers, Sherry Cooper Chief Economist at Dominion Lending Centres thinks the outcome is dependent upon when the pandemic ends, “Yes, if the pandemic conditions last beyond a year. No, if we can return to normal working conditions by 2021. Clearly, this is an enormous challenge for families, and the burden typically falls on the mother.”

Travel restrictions should remain in place say 50% of Finder panelists

Almost no industry has been impacted more than the travel sector and if the views of the Finder panel are to be believed, these impacts will continue.

Half (50%) of the Finder panel believe the travel restrictions should remain in place until the pandemic is completely over, with a little over a quarter (28%) thinking the restrictions need to be eased.

Carl Gomez is all for keeping restrictions in place until the end of the pandemic simply saying, “The health risks from non-essential travel outweigh the costs of not re-opening the border.”

In the other camp is Sherry Cooper who, while not calling for the restrictions to be lifted immediately, says that we need to treat this as a fluid situation.

“I think it is important to make adjustments as events change. We have no idea what the fall will bring, but if we get a surge, we need to keep the borders closed. If and when the situation improves, we can ease the restrictions for low-case country visitors.”

The panel also paints a bleak picture for the future of the travel sector, with almost two-thirds of panelists (64.7%) predicting that many travel SMBs will be forced to shutter their businesses in the coming 6 months.

Dr. Vik Singh thinks that the loss of summer trade will be the catalyst for closure for many businesses, “The lucrative summer season has been lost. Many of them will not be able to sustain over the slower fall season.”

Roelof Van Dijk agrees, adding that those businesses who’ve failed to attract domestic tourists are particularly in trouble.

“Many travel companies might be able to make it through these tough times with the increase in locals domestically traveling. For those businesses that are not attracting enough for domestic travel spend, or are more heavily reliant on tourism from abroad, these are the businesses that will disproportionately suffer. We expect to see a jump in travel tourism bankruptcies in September for those businesses that were not able to attract enough business during the all-important summer season.”

Six-month economic outlook

We asked our panellists about their six-month economic outlook for wage growth, employment, underemployment, cost of living, household debt and housing affordability. These measures all continue to fluctuate more than the usual due to the highly uncertain economic landscape.

The most positive outlooks, like the last report, are for ’employment’ and ‘underemployment’ with 63% each coming in as positive, slightly less than last time but our experts are still generally optimistic that the economic reopening will see more Canadian jobs become available to those left out of work during the pandemic.

Last report the panel mostly viewed ‘cost of living’ as evenly split between negative and neutral but now the majority of experts (58%) see it as neutral with only 10% viewing this measure as positive. In a stunning reversal from July’s report only 11% view housing affordability as positive when last BoC report that figure was nearly 44%.

The panel remained consistent on their view that household debt will largely be negative (47%) or neutral (32%) in the near term and wage growth is also seen to remain stagnant with only 21% of experts viewing this area as positive with most (42%) seeing it as a neutral indicator.

Real Estate Outlook

Real estate predictions for Canada at the start of the pandemic skewed toward widespread correction but instead what happened in many major markets was a resurgence of new listings as the economy reopened and either flat prices or even price increases in popular markets were seen.

Our panel still believes residential real estate prices will remain relatively flat by the end of year. If there is a larger correction in the future, it likely won’t be in 2020.

Carl Gomez, Chief Economist for C.G. Economic cConsulting provides expert insight into why property values didn’t suffer in the Canadian housing market this summer despite the recession and why prices may decrease more in future.

“The sharp bounce back in home sales was inevitable due to the release of pent-up demand that developed during the lockdowns over the critical spring selling season. Lower mortgage rates definitely helped to unleash that demand. But now that this has passed, soft economic fundamentals such as weaker population growth (due to constrained immigration), high unemployment, increasing strains on family households from rising costs, and weakening consumer confidence is likely to constrain future demand. At the same time, there is a considerable pipeline of potential new supply on its way. These forces are likely to result in a growing disequilibrium in the housing market.”

The theme around new supply really resonated with many of our panelists when we asked for their thoughts on the future of the Canadian housing market.

Sri Thanabalasingam, Senior Economist at TD Bank explains, “a partial labor market recovery and ending mortgage deferrals could increase housing supply later this year, potentially putting downward pressure on prices.”

Dr. Vik Singh, Professor at Ryerson highlights specific concerns around the urban environment, stating, “the biggest challenge will be in the condo markets in Toronto and Vancouver. The impact of softening in the rental market will indirectly impact investors in this sector.”

Helmut Pastrick, Chief Economist at Central One Credit Union, maintains until the existing supply issue corrects, “affordability remains the top challenge.”

Lars Osberg, Professor of Economics at Dalhousie University believes 2021 is when the economy, including real estate, will take a more negative turn.

“In 2021 we are likely to see a bust, but for now there is a mini-boom as affluent households shift their portfolio to real assets (i.e. housing) & away from uncertain stocks & puny bond yields.”

Commercial and Retail Real Estate Demand

While the Canadian economy is gradually reopening, there is no denying there is a move toward more virtual and flexible work arrangements for thousands of Canadians will have some impact on Canada’s commercial and residential real estate industries.

Last report, we asked our panellists if they believed housing demand would increase in the suburbs and rural areas while decreasing in cities as a result of this trend. Just over one third of them (36%) believed it would. And any amount of residential exodus to the suburbs, coupled with the ability to cease the regular office commute could have serious implications for commercial real estate.

In fact, the vast majority of our panellists (94%) believe it is either likely or very likely that the pandemic will have a negative effect on commercial real estate – both office and retail (in terms of vacancy, new supply or rents).

Roelof Van Dijk, Director of Market Analytics & Market Economist at CoStar Group, leading Commercial Real Estate experts, provides a comprehensive analysis on the challenges that Canadian commercial real estate faces in this unprecedented recession.

Office vacancy rates in most markets across Canada were expected to increase prior to COVID-19 as a result of new supply, and are now likely to increase more as a result of increased sublet space in the short term, bankruptcies in the medium term and non-renewals or downsizing in the long term. [Locally the situation varies] as in markets such as Vancouver and Toronto, vacancy rates were exceptionally low prior to the downturn and should remain relatively balanced over the 3-year horizon…Calgary on the other hand started with exceptionally high vacancy rates, and this situation will only add to the pain there.”

Finally, Van Dijk predicts, “retail real estate is expected to fare the worst, as brick and mortar retail was impacted by the economic shutdowns most…with vacancy, on average, expected to move up dramatically in the second half of 2020 and throughout the first half of 2021. Then rental rates will likely fall dramatically, by -10% to -25% over the next 18 months.”

Lander sees a possible turnover from commercial to residential saying, “A lot of commercial real estate space is going to remain empty. At some point, retrofitting these spaces and converting them to residential becomes economically viable. At that point, a huge supply of housing could come onto the market and prices could fall. Municipal zoning laws can help speed up the process. Homebuilders need to be careful that decisions taken today do not add to the possible glut of housing to come.

James Knightley, Chief Economist at ING agrees with Ladner but paints a potentially more disruptive picture of the future of commercial real estate and of cities themselves.

“[There is now] less need for offices with fewer people working in them. This leads to less footfall in cities with the knock on effect that there is less need for restaurants, bars, shops etc. In consequence, cities will get smaller and then you have additional questions such as are schools and hospitals situated in the correct area? What happens to tax revenues? As cities empty out do more people start to leave as fear of crime rises?”

Housing Values To Hold Steady Across Canada

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 from most anticipated decreases in value to least.

Like our last BoC report in July our panel continues to take a moderate view of residential housing valuation, not predicting any major changes from now until the end of 2020. In fact, this time around the panellists have become just slightly more positive. Last report they predicted an average decline in property value of 2% across 10 major markets and this time that has risen 5% to become an average increase in value of +3%.

This time around Toronto is predicted to see a 5% increase by the end of year, likely due to the fairly strong summer market which saw price growth as compared to last year. Vancouver, Hamilton and Ottawa follow this trend with predicted 4% price increases by close of 2020. Montreal is predicted to see a 3% increase, while Halifax and Winnipeg could see more moderate average increases of 2% each. Quebec City may see some price growth at a predicted 1% average increase, while Calgary and Edmonton may remain totally flat at 0%.

Image: Getty/Supplied

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