Bank of Canada may have to cut rates deeper than global peers

Article content

It’s been quite the week — Donald Trump’s victory in the United States election sent stocks soaring and gold plunging yesterday, and today the Federal Reserve announces its rate decision.

The Fed is widely expected to cut 25 basis points after reducing its rate by a half point in September. But with interest rates starting to come down in the world’s major economies, there’s been a lot speculation about how low they will go.

Article content

An analysis by Capital Economics reckons the United States, United Kingdom and Australia will cut interest rates to an equilibrium or neutral rate — where borrowing costs neither stimulate nor restrict an economy —  of 3 per cent.

But rates in Canada and the eurozone will likely have to be cut further, below the neutral rate, to 2 per cent and 1.5 per cent, respectively, said Capital.

“This judgment reflects our view that economic weakness and spare capacity in the latter two economies will warrant policy support,” wrote Jennifer McKeown, Capital’s chief global economist.

Capital expects core inflation will be back on target by this time next year for all major advanced economies except Japan. Therefore, it is the state of the economy that is most likely to drive rates in the future.

Capital’s chart suggests the economies of Canada, the eurozone and Japan are operating below potential and they expect a negative output gap to continue through 2025.

“Our estimated Taylor Rules suggest that interest rates ought to fall to around equilibrium in the U.S., U.K. and Australia next year. But they should fall below that rate in Canada and the eurozone as economic weakness convinces their central banks that monetary policy stimulus is needed,” said McKeown.

Article content

Article content

Financial markets see the Bank of Canada‘s terminal rate at 2.75 per cent, but a number of Canadian economists are predicting the rate will go lower than that.

David Rosenberg, of Rosenberg Research and Associates Inc., expects the rate to settle at 2 per cent or even lower. Economists at CIBC Capital Markets put the end rate at 2.25 per cent.

Mind you, a lot could change with Trump in the White House.

The incoming president has promised tariffs on all imports that will hit global trade and trade with Canada in particular, and tax cuts that will further strain the U.S. budget. The main risks of his policies, experts say, are slower growth around the world and faster inflation in the United States, which will make the Fed less willing to lower rates.

Economists with BMO Capital Markets said Canada’s weaker economy is likely to keep inflation below 2 per cent even if tariffs put pressure on prices.

“The bank expects the economy to strengthen on the back of further planned rate cuts, and any threat to its outlook could spur a more aggressive response,” they said.

On the other hand, a slower Fed will put pressure on the Canadian dollar.

Article content

“The BoC slashed policy rates 50 bps in October, but a more cautious path of 25 bp moves over the coming months is more sensible given the post-election uncertainty and heightened risk to the Canadian dollar,” said the BMO economists.

 Sign up here to get Posthaste delivered straight to your inbox.

Bitcoin got a boost yesterday when Donald Trump was declared winner of the United States election. The digital currency jumped to a record high, trading at US$74,300 as of mid-morning Wednesday. Its last record was in March.

Bitcoin is viewed by many as a so-called Trump trade because the former president embraced digital assets during his campaign after a major push by the industry.

Trump vowed to make America the crypto capital of the planet, create a strategic Bitcoin stockpile and appoint regulators who love digital assets.

Under Joe Biden, Securities & Exchange Commission cracked down on the industry with a flurry of enforcement actions.

In Ohio, Republican car dealer and blockchain entrepreneur Bernie Moreno beat Senate Banking Chairman Sherrod Brown. Crypto titans spent some US$40 million to defeat Brown — a longtime skeptic of the industry — underlining the influence of their political outlays.

Article content

“The crypto industry feels like it’s been operating with one hand tied behind its back for years, and it senses that might be coming to an end,” said Matthew Hougan, chief investment officer of Bitwise Asset Management Inc. “People are starting to position for the next few years in crypto.”

— Bloomberg

• The United States Federal Reserve releases its latest interest rate decision
• Today’s Data: United States productivity, wholesale trade, consumer credit
• Earnings: BCE Inc., Canadian Tire Corp Ltd., Lightspeed Commerce Inc., Quebecor Inc., Bombardier Inc, Saputo Inc., Molson Coors Beverages Co, Airbnb Inc.

Recommended from Editorial

1. 

   Canadians pessimistic about infrastructure future, costs

2. 

   Risks loom in the mortgage market

---

If you’re a gold fan you might want to watch the yellow metal today. David Rosenberg, president and founder of Rosenberg Research & Associates Inc., talks about how the U.S. election could impact gold, but that’s not the only driver. Watch Rosenberg here to find out more about bullion’s record run.

Article content

Hard earned truths

In an ongoing series about what the next generation needs to know to build wealth, we offer hard earned truth #5: One stock can ruin your returns. Whether you own a few high flyers that can crash unexpectedly, or you miss out on big winners, a small number of stocks can drive a big part of market gains or losses.

McLister on mortgages

Want to learn more about mortgages? Mortgage strategist Robert McLister’s Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada’s lowest national mortgage rates, updated daily.

Financial Post on YouTube

Visit the Financial Post’s YouTube channel for interviews with Canada’s leading experts in business, economics, housing, the energy sector and more.

Today’s Posthaste was written by Pamela Heaven, with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at posthaste@postmedia.com.

Bookmark our website and support our journalism: Don’t miss the business news you need to know — add financialpost.com to your bookmarks and sign up for our newsletters here

Article content