Following the Bank of Canada’s decision on Wednesday to lower its key interest rate by 50 basis points (bps), experts weighed in on the bank’s path forward as it attempts to stick a soft landing.
David Rosenberg, founder and president of Rosenberg Research, told BNN Bloomberg there’s “no doubt” in his mind the central bank will continue to lower its key lending rate next year, though it may move away from the jumbo 50-bps cuts it delivered at each of its last two decisions.
“I’m most concerned about the destination… the era of 50-bps cuts is over, most likely, so they’ll shift toward 25 bps… but the direction is still down, and that’s a high-conviction call,” he said in a Wednesday interview.
“The signal is that they’re going to do some more, but at a slower pace, and that’s just fine.”
Charles St-Arnaud, chief economist with Alberta Central and a former economist at the Bank of Canada, told BNN Bloomberg the central bank likely believes it doesn’t need to “cut as quickly” next year since Wednesday’s cut to 3.25 per cent brought the overnight rate within its neutral range.
“I think from now, where the attention should be shifting is actually to: ‘How low are we going to get?’ What is actually the terminal rate going into 2025? We know there’s a lot of changes in the economy,” he said in a Wednesday interview.
“From slower population growth to all the uncertainty from the possible trade war with the U.S., it’s clear that we’ll have further rate cuts, but the question now is how far and how low are we going to go?”
Warren Lovely, chief rates strategist at National Bank of Canada, told BNN Bloomberg that it was “appropriate” for the bank to make consecutive jumbo cuts in order to bring its overnight rate within the neutral range of 2.25 per cent to 3.25 per cent as quickly as possible.
“We certainly don’t need restrictive interest rates anymore,” he said in a Wednesday interview. Canada’s annual inflation rate came in at two per cent in October, an uptick from 1.6 per cent the month before, but still within the bank’s target range.
“In our view, we still have an economy in transition towards weaker labour markets and you’re probably not stuck here at 3.25 per cent, so I would be expecting additional interest rate cuts from here,” said Lovely.
BMO Global Asset Management’s managing director of portfolio strategy, Bipan Rai, told BNN Bloomberg that he agreed with that sentiment, and added that the bank may need to adjust its rate path depending on which policies are implemented by Donald Trump’s incoming administration.
“There are known unknowns. What’s going to happen as soon as Trump takes office and potentially (implements) tariffs? Does the Bank of Canada need to ease further in reaction that that? That’s something they’re going to have to figure out as they go along,” he said in a Wednesday interview.
Rosenberg said that by the end of next year, the Bank of Canada’s key interest rate is likely to reach two per cent or lower since the Canadian economy is in a state of excess supply, with a negative output gap that’s still growing.
In order to stimulate more demand and close that gap, the central bank needs to “get the policy rate below the estimate of neutral,” he said, noting that during the last five Bank of Canada rate-cutting cycles, the bank stopped at two per cent or lower.
“So, two per cent sounds pretty radical, but I’m pretty sure that nine months ago if we said that we were going to be sitting at 3.25 per cent when we were at five per cent, you’d be saying: ‘Oh, come on, that’s too radical,’” Rosenberg said.
“I think two per cent or lower is where we will finish up, and probably by the second half of next year.”