Clairvoyance or excess caution? Is the Bank of Canada right to wait to change rates? Jimmy Jean, chief economist and strategist for Desjardins Group, believes that the central bank should not delay too much, otherwise it risks “shooting itself in the foot” and harming the economy.
“The Bank of Canada tells us that we must give monetary policy time to do its job. One of the questions I have is: what job? A work of destruction? », asked Jimmy Jean, in front of an audience of business people Thursday, during a CFA Montreal conference on economic prospects.
The economist notably recalled that monetary policy does not only act on demand, but also on supply. “Right now, in an economy like Canada, with housing needs, climate investment needs, can we afford to erode supply more than it already is? », raised Mr. Jean.
By waiting too long to lower rates, “we risk shooting ourselves in the foot” and harming “our economic potential,” he argued. According to him, the Bank of Canada should not “look in the rearview mirror” – that is, make decisions based on indicators from recent months – but rather adjust its policy based on this. which looms on the horizon.
Regarding wage growth which fuels inflation, Mr. Jean believes that unemployment will “break” this trend over the coming months. And on the point of housing, he emphasizes that “the persistence” of inflation in housing is “normal”, since this sector is “positively linked to interest rates”.
Rate cuts expected this year
In its projections, the Desjardins economic team predicts that the Bank of Canada could lower the key rate six times this year, with a first reduction in April, and that it will then lower it five times next year. .
The former deputy governor of the Bank of Canada, Jean Boivin, who was also invited to share his projections at the CFA Montreal conference, showed a little more reserve. The current head of research at global investment giant BlackRock also believes that the Canadian central bank will begin to lower rates but in a more moderate manner, believing that the road to controlled inflation will be winding.
“If we want to believe in a soft landing that lasts over time and in inflation that remains at 2%, we must also believe in a marked change in the labor market, a certain increase in the unemployment rate and growth in wages falling significantly. “It’s a lot to ask in a few months,” argued Mr. Boivin.
Stock market fluctuations
According to Jean Boivin, the first half of the year should be marked by enthusiasm on the stock markets, when central banks will begin to lower rates and “declare victory” over inflation. But this enthusiasm will fade in the second half of the year, he believes, when inflation will prove more persistent.
“We must therefore have, in 2024, a much more agile asset position. We position ourselves for risk at the start of the year, but we must also be ready to change course fairly quickly, perhaps in the second half of the year when inflationary pressures will become clearer,” argued Mr. Boivin. .
“Rather than six or eight reductions, we are more in the camp that it will be three reductions, plus an election [présidentielle américaine en novembre]… Things are going to be very different,” foresees the expert.
Desjardins estimates that financial returns will be more modest and volatile this year than they were last year. Notably, the return on Canadian stocks should be around 1.7% in 2024 according to their projections, compared to 11.8% in 2023. As for American stocks, Desjardins estimates that their return could be 2. 5% this year, compared to 26.3% last year. And on the bond side, the institution estimates that their yield should be around 4.5%, compared to 6.7% last year.