The head of one of Canada’s biggest asset managers says “the conditions are right” for the Bank of Canada to cut its policy interest rate to around 3 per cent by the end of next year.
Fiera Capital Corp. Chief Executive Officer Jean-Guy Desjardins said markets “have not dramatically or significantly reacted” to signals that the central bank is poised to lower its benchmark rate from the current 4.75 per cent to a “neutral stance.”
Getting the bank’s policy rate to neutral would imply about 175 basis points of cuts, he said.
The Canadian dollar has weakened 2 per cent over the past three months as it became clearer that the Bank of Canada would be in a position to cut rates ahead of the U.S. Federal Reserve. It finally did so last week, and central bank officials noted it was “reasonable to expect further rate cuts” if inflation continues to cool.
The moderate reaction by traders suggests that monetary-policy easing “is already embedded in markets,” Desjardins said. “So I think we would put a higher probability that the Bank of Canada will basically have the flexibility” to keep cutting.
The neutral rate is an estimate of where the policy interest rate would settle in an economy that’s running at its long-run potential and inflation is at 2 per cent. The Bank of Canada’s latest assessment is that the neutral rate is in the range of 2.25 per cent to 3.25 per cent.
The Fed is an outlier among major central banks because inflation remains hot and the U.S. economy is still running strong, Desjardins added.
“So, we had this separation between a number of countries going in the direction which was right for them, based on their economic conditions.” The European Central Bank also cut rates last week, and monetary authorities in Sweden and Switzerland have also lowered borrowing costs.
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