Economists weigh in on negative rates, Fiscal measures, Housing affordability
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The Bank will hold the overnight rate on April 15, according to economists on Finder’s BoC Interest Rate Forecast panel; a decision 92% or 11 of 12 agree with.
Just one panellist, Professor of Economics at Concordia University, Moshe Lander, thinks the Bank should cut the rate.
“If the Bank wants to challenge its theory that 0.25 percent is the effective lower bound, it can take an unconventional move to lower the target overnight rate by, say, 10 basis points, rather than the usual 25 basis points and see how markets react,” he said.
While the majority of the panel agrees the Bank should hold the rate next week, the panel is divided as to whether the rate should go below 0.25% at a later date. 58% say the rate should go no lower, 33% are unsure and 8% disagree.
Associate Director of Economic Forecasting for the Conference Board of Canada, Alicia MacDonald, like the majority of the panel, believes the rate should go no lower.
“As interest rates approach zero, further rate cuts have a less stimulative impact…when weighing the small stimulative benefit against the feasible large cost to the financial sector, there is not a strong case for further cuts to the overnight rate at this point,” she said.
Still a third of panellists, including Senior Economist at TD Bank, Brian DePratto; Deputy Chief Economist at Scotiabank, Brett House; Economics Professor at the University of Toronto, Angelino Melino; and Associate Professor of Economics at the University of Calgary, Trevor Tombe; are potentially open to the idea of negative rates.
DePratto said negative rates may need to be considered even though it’s not clear how effective they would be.
“The evidence of the effectiveness of negative rates is mixed, so it is logical that other tools be ‘taken off the shelf’ before moving into negative territory. But they are clearly still part of the toolkit – and in the event that things get much worse, no tool should be ruled out entirely,” he said.
Unconventional monetary policy
With the rate so low the Bank has engaged in unconventional monetary policy via the purchasing of government bonds. When asked how many billions the Bank will spend in total as part of the program, the panel average was $183 billion.
Half the panel believe the Bank will spend around $200 million, with other forecasts ranging from a low of $50 billion to a high of $300 billion.
Melino has this to say about the program;
“Normally, the Bank would cut its policy rate by 500 basis points in response to the current crisis. It can’t do that this time. Financing the increased government spending amounts to a real world “helicopter drop”, which is an appropriate tool for the Bank of Canada to use at this time.”
Laurentian Bank Securities, Chief Economist, Sebastien Lavoie, believes the Bank could end up purchasing more than $500 billion in different assets.
“A full-fledged QE program focusing on purchasing the federal bond yields to zero could help moderately at best given that the yield curve stands near 0.50%-0.80% except for the longs 30-year bond yield,” he said.
“A broader QE program going beyond the purchase of federal bonds and including corporate and provincial bonds is likely to be more effective given the challenging market liquidity. A more severe Covid-19 scenario could lead to a total purchase of $500B+ in different assets.”
Housing
This report we asked our panelists what their six-month economic outlook was for wage growth, employment, cost of living, household debt and housing affordability.
In an astonishing reversal 42% of the panelists now hold a positive view of housing affordability, when just last month only 9% of economists viewed housing affordability positively.
Last month experts warned of overvalued markets, specifically in notoriously expensive cities like Toronto and Vancouver, but with a changed outlook due to the severe economic implications of COVID-19, there seems to be hope that there will be housing opportunities where there were only affordability challenges pre-pandemic.
Fiscal policy
When asked if an additional stimulus package will be needed to combat the economic fallout of COVID-19, 89% of the nine panelists who answered the question said yes. The majority (five of eight), said around $100 billion extra would be needed.
Scotiabank’s Derek Holt, TD’s DePratto and Laurentian Bank’s Lavoie, who were in the majority, said they’d like to see targeted industry assistance in the next package. Lavoie suggested help could come in the form of a GST remittances break and a 0% GST rate to provide cash flows relief and support an eventual recovery.
Other suggested measures included a Basic Income Guarantee, supply boosting measures, summer employment for youth, further credit support for business and more support for low to medium income households and small businesses.
Unemployment
Despite the efforts of both the central bank and the government, many economists are expecting a spike in unemployment. Of the 11 panellists who answered the question, two – McCulloch Professor of Economics at Dalhousie University Lars Osberg and Concordia’s Moshe Lander – think we could see unemployment as high as 15% by October 1.
The panel average was less pessimistic, with an average forecasted unemployment rate of 10.2%. DePratto had the most positive forecast of 6.3%, followed by Macdonald at 7%, while House forecasted a rate of 8.5% for the year of 2020.
You can find additional commentary and embeddable infographics here: www.finder.com/ca/bank-of-canada-interest-rate-forecast