CB's STILL hold key rate steady at 5% | General financial discussion | Discussion forum

For me, the entire conversation about lowering interest rates that we continue to hear and see seems to be disconnected from reality. Headline after headline on my finance news feed features an economist de jour insisting how rates will drop next month, and how many times rates will drop by the end of the calendar year, etc. But who are these economists? Almost always, it seems like they're industry shills whose livelihood and that of the corporations they work for are being negatively impacted by higher rates and the resulting slowing of frenetic economic activity (particularly real estate sales). And when unaffiliated, academic types of economists speak in more realistic and sensible tones, their voices and assertions aren't given the same type of media coverage.

For example, the predictions made late last summer by Rotman associate professor emeritus of economics Peter Dungan didn't exactly get a lot of airtime.

“[The policy rate] is not going back to two — it’s just not — unless we have a serious recession or emergency,” said Duggan, who believes that central banks in Canada, the US and around the world fueled inflation because they knew that interest rates were unsustainably low in 2020. “Those numbers are gone for good, except as a way to stimulate the economy, so you might go to 4.5 per cent, but it will probably be north of 4 per cent until the next serious emergency, when central banks need to cut policy rates drastically to help the economy.”

In other words, if inflation cools, we might see a couple of quarter point drops -- but that's it, unless total economic catastrophe looms. It's not a total contradiction of the industry-affiliated economists, with their calls for lowering rates by a quarter point in June or July. But it seems to be a more sobering and realistic way of predicting the future path for central banks. In contrast, industry shills call for rate drops in a euphoric way that implies to many hopeful cash-strapped debtors that a couple of quarter point drops will be just the beginning of a rapid restoration of pre-inflation rates.

By the way, today's move by Tangerine to raise 4 and 5 year GIC rates to 5 percent adds credence to Duggan's predictions. It seems likely that more FIs will be wooing depositors with similar rates soon.

I do agree that the federal banks telegraph reasonably well what they will or will not do in the short term. What I think they could do better is to clarify what is obvious to anyone who takes the time to listen and look around them: that while rates may drop a little as inflation cools, they will never get back to the low pre-pandemic levels we saw, and, in particular, the insanely low levels at the beginning of the pandemic. In this regard, central banks could do a much better job of cooling the unreasonable speculation that the free money train will be once again pulling into the station in the months and years ahead (barring a serious economic collapse).

I think BoC has been better at saying the new 'neutral' rate will be higher in the future than it has been in the past than has the Fed Reserve but I may be mistaken. My guess in the absence of a major event, neutral rate will settle in the ~3+% range as compared to current range estimates of 2.25-3.25% https://www.bankofcanada.ca/2024/04/staff-analytical-note-2024-9/

It does not seem probable that the neutral rate will fall back to 2019 rates (note the lowest rates occurred during the pandemic). Back in 2014, the nominal neutral rate was estimated at 3-4% https://www.bankofcanada.ca/2014/09/discussion-paper-2014-5/ and is where we should hope it to be, but may not occur given our western economy simply no longer has the GDP growth strength (productivity) to support 2014 style rates . Only time will tell over the next 1-2 years which is how long I think it will take to settle in to a new nominal neutral rate.

Agreed and that is really the point of the changing views of 'neutral interest rates'. But be wary that this thread is a continuation of the dispute/disagreement from months back on who is the cart and who is the horse. I am not engaging in that silliness again.

smayer97 said

The bank is quite good at messaging what it wants to do next....but ....

mordko said
Does not matter what CBs say. If we see another economic crisis, there will be another round of monetary easing, zero/negative, bond buying, etc. Will be the right thing to do and they’ll have no choice. Just like when they promised zero rates forevermore and were forced to change mind by Mr Inflation.  

In other words, the market determines the direction and amount of the rate changes 😉  

You are missing the timeline. CBs can and do “predict” what they are going to do at the next meeting. They do it well. And bond traders react. Both CBs and bond markets are far, far worse at predicting next year’s inflation, employment and economic strength, and therefore overnight interest rates.

smayer97 said
And yet when the CB's talked about wanting to lower the rates, the markets did not react in like kind, and either brushed it off and stayed the course or went slightly the other way.

I think its because most people can read and understand what it means when the governor says (and I quote) “it's "premature" to be discussing a cut to interest rates.”