As the Bank of Canada (BOC) overnight rate stays the same for another month, we are turning our attention to the long-term interest rate forecast for 2020.
On October 30, 2019, the BOC announced that the overnight interest rate would stay at 1.75% — the same rate it has been for more than a year. The Bank Rate is correspondingly 2% and the deposit rate is 1.5%.
The stay did not come as a surprise to many, although some were predicting the BOC would follow in the U.S. Federal Reserve’s footsteps and cut the overnight rate.
In its announcement, the BOC indicated that they will be keeping a close eye on monetary policy as the outlook for the global economy has weakened further since July 2019. Ongoing trade conflict, uncertainty, and fallen commodity prices are all on the global radar.
Closer to home, growth in Canada is expected to slow in the second half of 2019, the BOC said. The sources of resilience in the Canadian economy — consumer spending and housing activity — will continue to be monitored.
With that in mind, the interest rate forecast for 2020 is temperate. Many economists have predicted there will not be any further interest rate increases next year (the last increase was in October of 2018). The question then becomes whether the BOC will continue to keep rates flat or if they will decrease them.
At the Teranet Market Insight Forum on October 22, 2019, interest rates were featured in the presentation given by CIBC Deputy Chief Economist Benjamin Tal.
Tal commented that globally, interest rate cuts have not worked. He pointed to Germany’s economy specifically.
“Why are they cutting interest rates? They say to stimulate the economy,” Tal said.
“And I say you reach a point when you go negative that it’s counter-productive. It’s actually hurting you. That’s exactly what you see in Germany. In Germany, interest rates are negative. You would expect consumption to rise because that’s what you’re doing. You’re trying to stimulate the economy and get people to consume. The opposite is the case.”
According to Tal, instead of the consumption rate rising, the savings rate in Germany is going up.
“The consumption rate is not rising,” Tal said. “It’s falling. And that’s why they are in a recession.”
As interest rate uncertainty continued, Tal said it is important to make sure that we do not go into negative interest rate territory.
Livabl recently reported that the Capital Economics team predicts there will be an interest rate cut at the December 4, 2019 BOC announcement and another in early 2020, bringing the overnight rate down to 1.25%.
However, Stephen Brown of Capital Economics told Livabl that this will depend on global factors.
“[W]e would stress that the chance of a rate cut would diminish in the event of a positive outcome from the ongoing talks between the US and China over trade and other matters, which will culminate at the APEC meetings next month,” he wrote.
“The dovish tone of today’s [Oct. 30] policy statement suggests that the Bank of Canada has become more cautious in its holding pattern amid a weakening global economy. …
“The statement and the fresh batch of more pessimistic growth forecasts will raise questions about the central bank’s commitment to a neutral stance on rates, particularly in the face of global easing in many other countries that has made the Bank of Canada an outlier. If the Federal Reserve lowers its interest rates later today, as expected [note: the U.S. Federal Reserve did lower interest rates on October 30: https://www.cnn.com/2019/10/30/economy/federal-reserve-rate-decision-october/index.html], the Bank of Canada would have the highest policy rate in the industrialized world.
“It may well be that the Bank of Canada cuts rates early next year. Mitigating this prospect is that the Bank was more bullish on consumption and housing–fueled by the robust labour market. Another source of future growth is additional fiscal stimulus from Prime Minister Justin Trudeau’s newly elected Liberal government, which has promised to implement new spending and tax cuts next year. For now, the Bank is maintaining a neutral stance.”
Before we reach 2020, there is one more interest rate announcement scheduled for December 4, 2019. Share your thoughts about what will transpire with us on social media. Find Purview on Facebook, Twitter, and LinkedIn and leave your opinion.
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