Bank to hold the overnight rate at 0.25% for at least a year

100% of economists forecast a rate hold on June 3

•Around 87% think the rate will stay at 0.25% for more than a year

•20% think a depression is on the cards

The Bank will hold the overnight rate on June 3, according to economists on Finder’s BoC Interest Rate Forecast panel; a decision around 87% or 13 of 15 agree with.

Just two economists, Professor of Economics at Concordia University, Moshe Lander and Professor Angelo Melino from the University of Toronto believe the rate should decrease without going negative. Melino and Lander called for a 10bp decrease to 0.15%, with Melino suggesting the bank could also try a 25bp cut to 0%.

“The Bank is worried about pushing below its effective lower bound. 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.” said Lander.

However most panellists believe further rate cuts won’t do much to help the economy and that the rate will stay at 0.25% for some time.

Craig Alexander, Chief Economist at Deloitte, thinks the rate will remain at 0.25% until the second half of 2021, acknowledging that “the economy is in a deep recession, but taking rates negative will not be stimulative.”

Nearly half (46.67%) of panellists say the rate will hold for more than a year and an additional 40% don’t think there will be a rate move until 2022. Only 13.33% believe there will be any movement within the next 12 months.

Brett House, Deputy Chief Economist at Scotiabank says they don’t foresee an increase in the policy rate until 2022 given efforts to contain the COVID-19 pandemic have opened up so much slack in the Canadian economy.

Instead he says the Bank will focus on additional asset purchases to ensure smooth functioning of credit markets and accessible yields.

Economic outlook

Despite rock bottom interest rates and large fiscal stimulus 20% of panellists say it is likely or very likely that the current recession will evolve into a depression.

Atif Kubursi, Emeritus Professor of Economics at McMaster University, believes a depression is very likely given there is no evidence the COVID-19 crisis will end soon and because of “the drastic structural changes the virus has already made to globalization, nature of work, real estate footprint of businesses, and particularly to large crowd based activities”.

Lars Osberg, Professor at Dalhousie Economics thinks anxiety about possible inflation will limit monetary policy and worries the deficit will limit fiscal policy, resulting in insufficient macro stimulus.

However most panellists (80%) are more optimistic, many citing the unprecedented fiscal and monetary response to date and apparent willingness to do whatever it takes.

Melino believes the recession will be deep but relatively short.

“The recession was driven by policy mandates to slow down the spread of the pandemic. I believe a relaxation of these mandates along with the development of treatments and or vaccines will allow the economy to recover most of the lost ground by next year,” he said.

Finder

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