The Bank of Canada will require another year of its rate-cutting cycle to absorb the number of resources in the economy that aren’t being used so it can raise interest rates back to a neutral 2.75 per cent position, according to Katherine Judge, director and senior economist of capital markets at CIBC.
Delivering the keynote session at the Canadian Investment Review’s 2024 Defined Benefit Investment Forum, she noted the central bank is currently well into its rate-cutting cycle. “Right now, the risks for the Canadian economy are certainly to the downside simply because of the threat of U.S. tariffs, . . . . as well slower population growth.”
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In early December, Canada’s unemployment rate climbed to 6.8 per cent, said Judge, noting 5.7 per cent is what’s typically considered a neutral rate. Since central banks rely on these numbers to build their inflation predictions, these results help shape the monetary policy that will be felt, on average, in the following four to eight quarters.
“[The unemployment results are] very concerning and that certainly argues for faster rate cuts. I think there’s a pretty good case for the Bank of Canada to just cut straight to neutral. But they can’t front run the [U.S.] Federal Reserve too much because then they start to worry about the currency.”
With speculation growing about the potential actions from U.S. president Donald Trump, a tariff uncertainty effect is taking hold of the market, she said, which could end up being a leading risk factor throughout the year. Generally, a tariff is designed to re-shore an industry’s production and, if done effectively, wouldn’t lead to any revenue collection.
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“What Trump’s tariffs on China highlight is that there’s just a re-globalization rather than a deglobalization. Supply chains essentially were lengthened and now you’re seeing a lot of Chinese foreign direct investment into Mexico and other emerging market economies that then export goods into the U.S.”
Trump has threatened Canada and Mexico with a 25 per cent tariff on all goods entering the country, while other countries could face a blanket 10 per cent tariff. If the larger tariff policy is enacted, the move would be a significant blow to the Canadian economy, said Judge.
“At least in the 10 per cent case, there is room for the Bank of Canada to cut interest rates more and offset some of the impact on the domestic economy that way. In the case of a 25 per cent tariff, there’s no way [it] could mitigate that impact on the economy.”
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Canada will be monitoring the U.S. in more ways than one since the Bank of Canada is limited in how much it can cut interest rates ahead of the Fed due to concerns around the value of the Canadian dollar.
“The fear is that if [the currency] gets weaker, you start to import inflation,” she said. “There’s a limit to how much [the Bank of Canada] can front run the Fed. But if that force wasn’t at play, we should certainly be below 2.75 per cent in rates right now, because you’re seeing unemployment broaden.”
Read more coverage of the 2024 DB Investment Forum.