Despite the signs of COVID-19’s ongoing suppression of the Canadian economy – economic unease, elevated unemployment, dire predictions from the CEO of the Canada Mortgage and Housing Corporation – few Canadian mortgage experts expect the Bank of Canada to do much of anything when its scheduled rate decision is made on Wednesday morning.
After an unscheduled March 27 reduction brought the overnight rate down to 0.25 percent, the BoC described the level as being the policy rate’s “effective lower bound”. As such, many feel it is unlikely to be reduced any further.
At a recent Finder.com interest rate forecast panel, 13 of the 15 economists polled said they expect the BoC to hold the overnight rate. Craig Alexander, Chief Economist at Deloitte, things the rate will be held at 0.25 percent until the second half of 2021. Taking rates negative, Alexander says, “will not be stimulative.”
Almost half of the event’s panellists feel the rate will hold for more than a year; 40 percent don’t expect another rate move until 2022.
The sentiment was strikingly similar among “nearly every economist polled by Reuters” on the same question, the organization reported on May 29. Of the 24 economists approached by Reuters from May 26 to 28, 23 expect the BoC to hold the overnight rate in place. “[T]he downside risk suggests that the bias is still likely to be toward further policy support,” said Capital Economics’ senior Canada economist Stephen Brown.
RateSpy founder Robert McLister says the Bank, having run out of traditional medicine with which to treat the economy, is in “hope and pray mode.”
“Zero or negative rates are a risky, unproven treatment that [the Bank of Canada is] saving as a last resort,” he says. “For now, the BoC will probably just keep buying bonds and supporting lending, especially since the patient is showing signs of life. Businesses are re-opening, oil has rallied and unemployment claims are slowing.”
McLister says leaving the rate as-is may also reassure markets by providing a small dose of optimism and leaving itself open to taking further measures to keep the economy from flatlining.
“It may even provide extraordinary forward guidance like it did during the financial crisis in April 2009,” when rates were similarly low and the economy required more stimulus, McLister says. “The BoC promised to keep the policy rate at 0.25 percent for over a year, so long as inflation risk didn't jump significantly. That low-rate assurance gave consumers and businesses confidence to borrow and spend.”
Fourteen months later, the economy had rebounded and the Bank started hiking rates again.
Charting a similar course will be difficult considering the dense fog that’s obscuring the future of the Canadian economy, but a 14-month rebound after one of the worst financial shocks in modern human history doesn’t sound so bad. If, by holding its rate on Wednesday, the Bank of Canada can steer the economy, ever so slightly, toward a gradual, steady recovery, few will find reason to complain.
But some believe the Bank should lower its rate further. Concordia University professor Moshe Lander, one of the dissenters at the Finder.com panel, thinks the overnight rate should be lowered another 10 basis points.
“The Bank is worried about pushing below its effective lower bound,” Lander told the audience. “I think it should be unconventional in these unconventional times and try a 10 bps decrease and see what happens. It can move incrementally until it really does reach the lower bound.”