Interest rates won’t return to pre-pandemic levels anytime soon, experts warn. Even as the risk of a recession hangs over the Canadian economy, the Bank of Canada will not ease its monetary policy for “a very long time”, estimates a former leader of the institution.
The pause in the hike in the key rate announced by the Bank of Canada “is not the start of an easing cycle”, warned Jean Boivin, managing director of the BlackRock Investment Institute, during a conference organized by CFA Montreal on Thursday.
In front of an audience of business people, the former Deputy Governor of the Bank of Canada stressed that the institution “would not be able to make this relaxation for a very long time”, in his opinion.
Between taking the risk of generating a recession to bring inflation down to 2%, or that of losing control over inflation and thus its credibility, “I think it’s a no brainer for all the central bankers: they are going to choose recession,” indicated Mr. Boivin.
Jimmy Jean, vice-president, chief economist and strategist at Mouvement Desjardins, also a panelist at the conference, also pointed out that interest rates would take time to come down – a trend that contrasts with the last fifteen years, where the monetary policy was “sometimes accommodating, sometimes extremely accommodating”.
“There will be a decline, but contrary to what we usually see in a recession, it will be very measured and very slow,” said Mr. Jean. The economist predicts that the key rate could converge towards 2.5% by the end of 2024 and then remain at this level.
In the case of a deep recession, “like in the 90s, there one would think that inflation would perhaps fall below the target, and there then the central banks could reduce [les taux] a little faster,” added Mr. Jean.
An unusual situation
“It’s not at all a typical recession that we face,” said Jean Boivin, who points out that the economic environment has changed radically since the pandemic.
“There was a break with the last forty years – a period that was dominated by shocks that came mainly from fluctuations in demand, such as consumer spending, business investment, around production capacity that was quite stable, he explains. Since 2020, that has changed radically. Now, we are in a limited environment, determined by supply, by production constraints. »
In this context, the managing director of the BlackRock Investment Institute believes that the tools used to solve the recessions of the past will not be suitable for the one that awaits us. “It is believed that central banks will not be able to cut rates. It is believed that inflation will not be as low as the markets are currently anticipating. »
But as the economic environment has changed, could central banks revise their inflation target? “If there is a change in target, it will only be after they have stabilized inflation at 2% for a certain period of time, that they have demonstrated that they are able to do this, and then maybe the door will be opened to say: is this really the right target? But until then, it’s clearly not in the cards, ”believes Mr. Boivin.
Moreover, if there has indeed been a downward turn in inflation over the past few months, it would be wrong to see it as a direct line towards inflation at 2%, in the opinion of the expert, who rather believes that the road to this target could be winding.
In December, annual inflation continued its slow decline, settling at 6.3% in Canada. It peaked at 8.1% last summer.