Bank of Canada silent on future rate cuts

The Bank of Canada’s decision to cut interest rates for the sixth consecutive time has left many economists questioning the central bank’s future moves. On Wednesday, the Bank lowered its benchmark rate by another 25 basis points to 3%, down from 5% in June. However, despite this reduction, the Bank remained tight-lipped about its next steps, a report from the Financial Post noted.

Avery Shenfeld, chief economist at CIBC Economics, pointed to the ambiguity surrounding the Bank’s decision-making process, saying, “The Bank of Canada isn’t so sure about what comes next, but then again, who is?”

The central bank’s hesitation stems not only from potential tariff threats but also from ongoing difficulties in determining the neutral interest rate — a key indicator of the borrowing rate that neither stimulates nor depresses economic activity.

Will there be another rate cut soon?

The neutral rate is crucial for understanding how much the Bank can reduce rates to promote growth without stoking inflation. But its exact position remains elusive. Shenfeld explained, “The [Bank of Canada] faces some uncertainties over where the neutral rate lies and, therefore, how low rates need to be to achieve their projected pickup in economic activity.”

While the Bank is forecasting Canada’s GDP growth to rise from 1.3% in 2024 to 1.8% in the next two years, economists suggest that the current rate of 3% is still restrictive, limiting economic growth. Shenfeld believes further rate cuts, possibly totalling 75 basis points, are needed to reach the neutral range of 2.25% to 3.25%, with 2.25% marking the lower end of this range.

Factors like a “soft” labour market and “tame” inflation are contributing to expectations for additional rate reductions, Shenfield noted. However, as the threat of tariffs looms, he highlighted that any future rate cuts would depend on how the government responds fiscally.

Economist Charles St-Arnaud of Alberta Central shared a similar outlook, predicting that another rate cut could occur in March. St-Arnaud argued that slower population growth in the coming years would likely lower the neutral rate further, making the current 3% policy rate more restrictive.

David Rosenberg, founder of Rosenberg Research & Associates, added that the Bank’s estimate of the neutral rate may be flawed, as it is based on an economy in “perfect equilibrium.” He argued that Canada’s economy, with a 6.7% unemployment rate and inflation below target, is far from balanced. Rosenberg believes interest rates should be even lower, potentially at 2% or even 1.5%.

If tariff threats materialize, Rosenberg warned that the Bank of Canada might be forced to push rates down to near-zero levels.

Source CMP
By Jonalyn Cueto