Former Bank of Canada Governor on why we're not going back to a 2% interest rate
Canada is not likely to return to interest rates between one and two per cent, according to a former Bank of Canada governor who also believes rate cuts will not come until late next year –at the earliest.
David Dodge, a senior advisor at Bennett Jones and former governor of the Bank of Canada, told BNN Bloomberg that Canadians should expect interest rates to “come down a bit” around the end of 2024 or early 2025.
But even when the central bank eventually lowers its benchmark rate from the current five per cent, Dodge said he thinks it will remain above levels seen in previous decades. He predicted rates will hover at around 3.5 per cent.
“We're not going back to the (around) two per cent interest rate at the Bank of Canada that we enjoyed in the 10 years leading up to COVID-19,” he said in a television interview. “And we’re certainly not going back to the one or one and a half per cent that we had as recently as 2021.”
Dodge spoke ahead of a scheduled Sept. 6 interest rate decision from the central bank, and a day before Statistics Canada’s scheduled release of second-quarter gross domestic product figures. With that key economic data still to come, Dodge said the economy appears to be still generating excess demand.
POST-COVID ECONOMIC REALITY
According to Dodge, some economists and the broader market have an overly optimistic view of where interest rates and the real rate of interest will settle. He said the “basic assumption that a lot of people make is that we’re going back to pre-COVID-19 times,” when the real rate of interest was near zero.
“That's just wrong,” he said. “It will not be the case again, there are all sorts of factors that are going to push up pressures on inflation going forward, which means the central banks are going to have to be tighter than they were in the pre-COVID-19 period.”
FEDERAL IMPACTS: DEBT SERVICING COSTS
If interest rates end up staying higher for a longer period of time than some anticipate, Dodge said the federal government will be impacted by higher debt servicing costs.
He said the latest federal budget made the assumption that debt service costs for the government would be roughly nine per cent of revenues – but by his estimation, the figure will be closer to 11 per cent or higher.
“They’re going have to plan a for higher debt service costs than (Finance Minister Chrystia Freeland) planed in her budget,” he said. “That means that there's going to be less room for government to do other things.”