Bank of Canada Policy in 2025: The Outlook for Rates and Key Factors Shaping their Path

Описание: Warren Lovely (National Bank of Canada) and Christopher Ragan (McGill University) returned for their fifth annual GRI Macroeconomic Policy Series webinar, providing their forecasts for Canadian monetary policy in 2025. Warren reviewed the Bank of Canada's easing cycle, which has led to a cut of 175 basis points since June 2024, a more aggressive trajectory than the U.S. Fed, suggesting underlying weakness in the Canadian economy. He also noted the widest divergence between Canadian and U.S. bond yields since the mid-1990s, and expressed concern over the potential impact on FX markets and the Canadian dollar.

Warren acknowledged Canada’s inflation, fiscal and political risks, but emphasized that Canada might have a more sustainable fiscal path compared to other advanced economies. He anticipated more conservative fiscal policies going forward, although defence spending could lead to some additional government spending. He suggested that the BoC would likely approach the lower end of its neutral policy rate range over the next year.

Christopher defined the neutral interest rate as the prevalent rate when real GDP equals potential GDP, inflation is at its target, and the economy has adjusted to past shocks. He discussed the interplay between savings supply and investment demand, and identified declining productivity growth and physical capital investment, and rising income inequality and life expectancy as key drivers behind declining neutral rates since the 1990s.

Chris highlighted increased government spending on the elderly, infrastructure, and defence, as well as private and public investments in energy transition, as forces likely to drive up the neutral rate in the coming decade. He stressed that while more cyclical rate cuts are likely in the near term, the above factors may mean generally higher rates over the next decade.

Chapters:

0:00:00 Welcome, land acknowledgement and housekeeping, Jason Stewart, GRI
0:01:42 Jason's introduction of topic and speakers
0:03:34 Warren Lovely introduction
0:04:20 Putting the current BoC easing cycle in perspective
0:05:24 Canada has need more aggressive interest rate relief than key peers
0:06:23 Interest rate divergence as a currency valuation driver
0:07:47 Some perspective (and caution) on market expectations
0:09:25 Government bond markets coming to terms with risk/uncertainty
0:11:29 Canadian and U.S. economies in fundamentally different performance zones
0:13:10 Canadian economic underperformance may be hard to fully redress
0:14:24 BoC quantitative tightening to have more bite in 2025
0:15:36 Chris Ragan introduction
0:16:08 What is the neutral interest rate?
0:17:50 A little macro theory
0:19:42 The market for loanable funds
0:24:18 BoC's target overnight rate - nominal and real
0:28:15 2.75% is the neutral estimate today but how bout the near future?
0:32:15 Question: Lessons from past 2 ½ years for US Treasuries and Canada bond yields? What should this mean for BoC’s policy setting in 2025?
0:35:51 Question: How different should neutral rates be for medium-to-long term bonds vs. short term debt?
0:39:02 Question: What is the optimal BoC response if threatened U.S. tariffs are implemented?
0:44:47 Question: How will the current political instability affect interest rates?
0:48:43 Question: How does climate change uncertainty affect the neutral rate?
0:50:13 Question: What are the consequences of ultra low rates?
0:55:04 Question: Is 2% the right inflation target for the BoC's next mandate?