Cost of living | Bank of Canada holds key interest rate at five per cent for the fourth time

The First Bank of Canada interest rate announcement of the year for a fourth time the key lending rate stays where it is at 5% here’s the bank’s Governor explaining why and what’s ahead if new developments push inflation higher we may still need to raise rates but what

It does mean is that if the economy evolves broadly in line with the projection we published today I expect future discussions will be about how long we maintain the policy rate at 5% governing council is concerned about the Persistence of underlying inflation we want to see inflationary pressures

Continue to ease and clear downward momentum in underlying inflation and we’ve got a panel of Chief economists here to break down today’s decision Avery shenfeld is managing director and chief Economist of CIBC Capital markets and Jimmy Jean is vice president and chief Economist and strategist for deard Dan group hello to

Both of you thanks so much for making the time for this Mr shenfeld I I’ll start with you that comment today that particularly stood out to me from the bank of Canada’s governor was around how the conversation at the bank’s governing Council has shifted from whether they’re being restrictive enough to how long

They’re going to stay at 5% what do you take from that comment I think it’s pretty clear that they’re assuming themselves that they’re going to be cutting interest rates sometime before the middle of the year around the middle of the year because in their forecast they talked about a

Pickup and growth in the second half tied to easier Financial conditions and that’s just code word for their rate cuts and then also when they talked about inflation they said one of the components of inflation which is the part that’s tied to renewing mortgages at ever higher interest rates is going

To start to slow down and again they’ll need to be cutting interest rates in order for that to happen so they’re just debating amongst themselves when they start easing but they’re pretty I think assured that inflation will eventually come down and that they need to start giving the economy a welcome dose of

Relief this year what do you think is in forming Mr Jean the uh discussion around the question of when Mr shenfeld pointed to a couple of things like where inflation is at and the degree to which the economy is being impacted H H how do you think that is informing ultimately

The question of when yeah well I’m concerned that unfortunately that uh that uh decision is being informed by a rearview analysis to a great extent because you know they talk about uh realize inflation and how this is sort of disappointed you talk about pressures on uh on shelter costs

And part of it is indeed as Avery mentioned is implicit to interest rates they talk about wages which we know is a lagging indicator uh so a lot of rearview uh mirror analysis when you know in fact they have that Steam Roller which is those renewals their own

Analysis suggests that it’s the average uh borrower will have to uh will see an increase in payments of 34% uh when this whole process is said and done and even assuming uh rate Cuts eventually so uh you know I think you’re looking at the Canadian economy and uh

You know even that historic pace of demographic growth is not able to fully offset the impact of renewals and here they are just you know worried about uh how they’re going to get to that 25% that’s that’s left to 2% and how that’s going to you know be the deciding factor

In terms of when they they they can cut when I I think in fact they can trust that what they’re doing is working and think about you know doing those rate Cuts sooner rather than later what do you think about that proposition Mr shenfeld uh going you know even in small

Doses sooner rather than later trusting that those rate cuts are going or rate hikes rather are going to have the desired effect and we’re already seeing signs that they are I think they understand that a slow economy will eventually bring inflation down they could end up cutting rates as

Early as April I mean it might be April it might be June actually don’t think the economy is that dependent on exactly when they start I do think they’re going to have to move reasonably steadily and fairly aggressively maybe a percent and a half cut this year because of those

Mortgage renewals because the economy is stalled and because the governor in his own words has repeatedly said that he doesn’t see the need for an outright recession to get inflation to 2% the economy right now is hovering on the edge of recession we aren’t really growing uh we’re declining in output in

Per capita terms so you know there’s a saying better late than never I don’t think that applies in this case I think they do have to move relatively early but I don’t think the spring would be too late to rescue the economy from the doldrums that it’s in now if the counter

Mr Jean is uh that inflation and and uh Mr Mack referred to this today uh it remains pretty sticky right in in in certain areas in particular um and if that’s the the part the portion of the calculation or the part of the calculation that is holding them back

From rate Cuts how would you respond to that concern well I mean it’s an environment where uh you you can’t be aiming for Perfection uh I mean it’s uh you’re still going to be dealing with a supply shocks you have a lot of lagged influence uh in the in the environment

The Mecha Canada mentions itself that you have Supply constraints uh especially in housing that uh is preventing the adjustment to the same extent that you would have seen in the past uh but when you look at uh the inflation expectations yes they’re still high but they’re still moving in in the right

Direction uh inflation I mean is it’s elevated everywhere but it’s uh it’s coming down as well everywhere and in the case of Canada you have an economy that’s highly sensitive to to interest rates so right now we’re talking about an economy that has stalled but if uh

You know we want to get to that perfect situation on inflation we’re going to be talking about in initiating ating rate cuts when the economy is uh in recession and has been in recession for for some time so uh I think you know the better

Way to go at it is to begin sooner and allow for a smoother process of interest rate Cuts rather than unnecessarily waiting and having to knee jerk uh as a response later on Mr shenfeld how do you account for the difference in economic growth in the US relative to Canada is

It I know that you know we we have fiscal stimulus they have a lot of fiscal stimulus is that it or is there more to the story I think that’s part of it the other part is that their household sector was a lot less indebted than ours and unlike Canadians Americans are

Locked into 30-year mortgages that they took out in many cases in in 2020 when rates were very low so as long as an American doesn’t move they’re not impacted by higher mortgage rates um those are some of the big differences between the US and Canada it’s why as

Jimmy mentioned we are historically a bit more sensitive to interest rate hikes and why the Canadian economy is therefore showing more urgency to get interest rates moving lower you know the financial markets are betting the Federal Reserve will cut more aggressively than the Bank of Canada because they have made a little more

Progress on their inflation measure but their inflation measure their official one that they track for montre policy doesn’t put as much of a weight on housing so they’re kind of measuring apples and oranges here I think the Bank of Canada does have to probably move a little more aggressively than the bank

Than the Federal Reserve in the US because as you mentioned in your question the US economy is weathering the storm of higher rates a lot better than Canada’s last question to you Mr Jean when we talk about the concept of being more aggressive in rate Cuts where

Does that in your view put things at the end of 2024 well uh you know in our view rates will finish the year at three and a half% so that’s six rate Cuts now uh you know when you look at things uh on a real basis so after taking into

Consideration inflation even that 3 and a half% won’t won’t bring back uh monetary policy into uh into the neutral uh level I think we’ll be on the edge of neutral but uh you know it’s still going to be for the better part of the Year still a restrictive uh policy so it’s

Not inconsistent with what Mr mckam is saying which is that we need to let uh to provide more time to for marre policy restriction to to act it’s not because you start dialing down slowly the the level of a of restriction that you’re all of a sudden flipping on the other

Side it’s just that you’re going at it in a smoother way that will prevent injecting unnecessarily unnecessary volatility into the economy Mr Jean Mr shenfeld I’ll leave it there appreciate your analysis this evening thank you

Avery Shenfeld and Jimmy Jean discuss the Bank of Canada’s decision to hold the key interest rate at five per cent.

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