Former BoC official sees key rate hitting 2.75 per cent soon

Former Bank of Canada Deputy Governor Paul Beaudry expects policymakers to cut their key interest rate until it hits at least 2.75%, with the path beyond that point less clear.

 

Beaudry said he expects the next move in January to be a quarter-point cut, after two half-point cuts in a row. Officials paired Wednesday’s rate decision with a statement that said they will evaluate the need for further cuts “one decision at a time,” but Beaudry said it’s obvious rates are still going to decline from this point.

 

The benchmark overnight rate is now at 3.25%, the top end of the bank’s estimate for the so-called neutral range. The bottom of that band is 2.25%, and Beaudry said the central bank will likely push to get to the middle of the range.

 

“It should be decreasing rather quickly to get there,” said Beaudry, who now teaches economics at the University of British Columbia. “Then the question is what will it do when it gets to the center of that band, which is about 2.75%?”

The central bank moved to slash rates by 50 basis points twice in a row without a recession or crisis that would warrant a rush to stimulate the economy. Beaudry doesn’t see these moves as a sign of panic, but as a way for the bank to move to neutral borrowing costs more quickly, since restrictive policy is no longer needed.

 

Officials are seeing more evidence of inflation returning to the 2% target, he explained. The annual increase in the consumer price index was exactly 2% in October and it has been within the 1% to 3% range for all of 2024.

 

“The right interpretation is really this aspect that rates were being held high until this central bank was really confident that it was going to hit its 2% target,” Beaudry said.

 

The former central banker, who left the governing council in mid-2023, has correctly predicted the bank’s next steps before. He called for a 50 basis-point cut in October at a time when traders in overnight swaps did not think that was likely.

 

 

 

 

This article was first reported by BNN Bloomberg