Veteran economist and commentator David Rosenberg says the Bank of Canada should continue cutting its key interest rate by 50 basis points (bps) at upcoming decisions in order to balance out demand and supply in the Canadian economy.
In an interview with BNN Bloomberg on Thursday, Rosenberg, founder and president of Rosenberg Research & Associates Inc., said that even though Canada’s central bank has cut its overnight rate four consecutive times, it remains “absolutely” too high.
“The inflation rate in the past year has gone down 220 bps and the policy rate has come down 125 bps, so do the math,” he said.
The Bank of Canada announced Wednesday that it was cutting its trend-setting interest rate by 50 bps to 3.75 per cent following three straight 25-bps cuts at its June, July and September decisions.
Inflation, meanwhile, fell to 1.6 per cent in September after a mostly steady decline from four per cent in August of last year.
Rosenberg said that based on the Bank of Canada’s own estimates, its overnight right is still roughly 100 bps above neutral; the hypothetical rate level which keeps the economy at full employment and inflation steady at the bank’s desired pace.
The central bank currently estimates that level to be between 2.25 per cent and 3.25 per cent.
In Rosenberg’s view, the bank’s key rate should not only be within the neutral range, but below it. The Canadian economy, according to the bank’s own monetary report, remains in a state of excess supply and is therefore in need of stimulative rates to boost demand, he said.
“If (the Bank of Canada) said the economy was in perfect equilibrium, then you’d say: ‘oh, well they’re only 100 bps tighter than they should be based on where the economy is,’ but they’re telling us the economy is in excess capacity,” Rosenberg explained.
“When we put the Bank of Canada’s own numbers from the monetary policy report into our model, in the next 12 to 24 months, it spits out these numbers: the inflation rate going to zero… and the unemployment rate up to eight per cent.”
‘Policy error’
Rosenberg said that the Canadian economy first moved into a state of excess supply in the summer of 2023 following a series of earlier rate hikes by the Bank of Canada aimed at bringing inflation under control.
“And what did the bank do? They kept on raising rates,” he said, referring to the bank’s decision to hike its key rate by 25 bps at consecutive policy decisions in June and July of last year.
“The first 50 bps of easing (this year) from five per cent to 4.5 per cent was just taking out the policy error of last year.”
Rosenberg argued that in the lead up to the bank’s current rate-easing cycle, it may have underestimated the weakness of the Canadian economy, as population growth inflated headline output numbers.
“We’re in a major growth turndown. Real gross domestic product (GDP) year-over-year is running at plus 0.9 per cent. But is that really that difficult to do with population growth because of the immigration boom,” he said.
“Population growth is running closer to 3.5 per cent, so ergo, real GDP per capita is negative 2.5 per cent year-over-year; (and) negative five quarters in a row, which by the way, has never happened without there being an official… recession. So, I think the Bank of Canada is still way behind the curve.”
Rosenberg added that although he believes the Bank of Canada’s policy rate should be lowered significantly, a super-sized 75-bps cut at their most recent decision would likely have created too much panic in the market.
“I think a steady diet of 50 bps cuts for the next several meetings should be in order,” he said.