Summary of Webinar:
GRI hosted a broad-ranging discussion featuring Christopher Ragan and Warren Lovely on the outlook of Canadian monetary policy in 2024.
Ragan began by discussing key factors shaping the Canadian economy in recent years, including negative aggregate supply shocks, an increase in government spending and the central bank balance sheet, supply-chain disruptions and pent-up demand, and heightened energy and commodity prices due to regional conflicts. He noted current expectations for the last two Bank of Canada (BoC) policy rate hikes in June-July 2023 to remain in effect for 12 to 18 months. Consequently, he anticipated that the BoC is likely to hold off on rate cuts until signs of excessive economic slowdown become evident. Further, Ragan discussed the dynamics of the neutral interest rate, highlighting that the BoC estimates the nominal neutral policy rate to be within the range of 2% – 3%. Looking ahead, he emphasized several forces, including infrastructure overhaul, an energy transition investment boom, and the impact of government debt on national saving, which could potentially elevate the neutral interest rate.
Lovely discussed the impact of the restrictive policy rate on the Canadian economy. Moreover, despite positive real GDP growth of 1.9% since the first quarter of 2022, the surging population growth rate of 4.8% has meant that Canada’s real GDP per capita has declined by 2.8% since then, and underperformed compared to the U.S. Lovely also highlighted the deviation in the BoC’s actual overnight rate from the debt market’s expectations and economic consensus from its expected target path in both 2022 and 2023. He also reviewed the BoC’s historical cycles of easing. Lovely emphasized the importance of BoC prioritizing a thorough reassessment of core inflation measures to enhance transparency. He concurred that an immediate, near-term pivot to low interest rates is unlikely.
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Dr. Christopher Ragan
Founding Director, Max Bell School of Public Policy & Associate Professor of Economics, McGill University
Managing Director, Chief Rates and Public Sector Strategist, National Bank of Canada Financial Markets