One veteran Bay Street economist predicts the Bank of Canada will need to bring borrowing costs down to pre-pandemic levels to avoid a deflationary scenario.
David Rosenberg, the founder and president of Rosenberg Research, said in an interview with BNN Bloomberg Tuesday that the two most recent rate cuts by the Bank of Canada have been “just an appetizer for the meal.” He added that the two cuts worked to “basically offset policy missteps” the central bank took a year earlier by raising borrowing costs amid an “excess supply backdrop that they’re now lamenting.”
“So it’s hard to know meeting-by-meeting what they’re going to do. I just know the destination because they’ve given it to us on a silver platter, because they mentioned the words excess supply not once, not twice, but thrice in last week’s policy statement,” Rosenberg said.
“The midpoint of the Bank of Canada’s target range on the neutral nominal rate is 2.75 (per cent), we’re at 4.5 (per cent). At 2.75 per cent, that neutral rate is supposed to coincide with an economy in balance, an economy that does not have a disinflationary excess supply backdrop. That’s where they have to get to at a minimum.”
Last week, the Bank of Canada cut its key policy rate by 25 basis points to 4.5 per cent, a move that followed a previous 25 basis point cut in June.
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Rosenberg said Canada’s central bank has been slow to act and says it is “as behind the economic curve today as they were behind the inflation curve two years ago.”
“They just swung the pendulum the other way. So I think that most if not all of the aggressive rate hikes that we had in 2022 (and) 2023 are going to be unwound…. I’m not saying we’re going back to zero… but I think we’re going back to the levels we were at before COVID,” he said.
Ed Devlin, the founder of Devlin Capital and a senior fellow at the C.D. Howe Institute, said in an interview with BNN Bloomberg Tuesday that he agrees that borrowing costs need to fall.
“It’s giddy-up time. It’s time to get going. Just like they sharply raised rates when they had unexpected inflation, it’s now very clear if you look at the monetary policy report they just published that there’s an output gap and even their forecasts are all deferred,” he said.
‘Inflation going to zero’
If the Bank of Canada doesn’t bring interest rates down fast enough, Rosenberg said he thinks the Canadian economy could face a “deeper recession.”
“It’s undeniable that we’ve had the unemployment rate go up 160 basis points from the cycle low,” he said.
According to Rosenberg, the increase in unemployment is a clear recession indicator.
“If they don’t move quickly, then we’ll be talking in the next two years of inflation going to zero,” he said.