Bay Street veteran David Rosenberg says the Bank of Canada’s decision on Wednesday to lower its key interest rate by a quarter percentage point to 4.75 per cent was the right move and predicted more cuts in the near future.
“(It was) 100 per cent the right move… there’s going to be more cuts coming. I would call this unequivocally a dovish cut,” Rosenberg, founder and president of Rosenberg Research, told BNN Bloomberg in a Wednesday interview.
Rosenberg said he expects inflation to continue its downward trend, which will give Canada’s central bank confidence that it can bring rates down further – and at a faster-than-expected pace.
“(The Bank of Canada) told us not once, not twice, but three different times in their press statement (Wednesday) that the economy is operating in a state of excess supply,” Rosenberg said.
“You don’t need a course in economics to know that when supply is running above demand, what happens is that puts downward pressure on inflation.”
Rosenberg argued that according to the bank’s own forecast, Canada’s economy will remain in a state of excess capacity for at least the next two years, which will lead to inflation and interest rates falling “much more than I think the markets have priced in.”
How low can rates go?
Rosenberg said that despite the Bank of Canada’s dovish tone of late, rates remain far higher than they should be in a supply-heavy economy. He predicts rates will eventually come down to two per cent, and possibly even lower.
“What is the appropriate policy rate for an economy operating in an excess supply environment? The appropriate interest rate is two per cent,” he said.
Rosenberg added that he expects Canada’s unemployment rate to reach as high as eight per cent in the coming years based on the Bank of Canada’s gross domestic product (GDP) output estimates, which will put additional pressure on the bank to lower rates to avoid a recession.
“We’re going to get to two per cent, that’s my call, and I’m not nervous that it’s too aggressive because I think that when we get there we might be talking about going below that,” he said.