David Dodge: Canada 'not going back' to pre-pandemic interest rates - BNN Bloomberg
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Ex-Governor: No Return To 2% Interest Rate
A former governor of the Bank of Canada predicts that the country will not witness interest rates ranging from one to two percent in the foreseeable future. Additionally, he suggests that any rate reductions will not occur until at least late next year.
According to David Dodge, a distinguished consultant at Bennett Jones and former chief of the Bank of Canada, Canadians can anticipate a slight decrease in interest rates towards the conclusion of 2024 or the beginning of 2025.
However, despite the eventual decrease of the central bank's benchmark rate from the current five per cent, Dodge expressed his belief that it will still surpass levels observed in past eras. He forecasted that interest rates will stabilize around 3.5 per cent.
"We won't be returning to the approximately two percent interest rate at the Bank of Canada that was favorable for us in the decade before COVID-19," he stated during a televised interview. "Moreover, we certainly won't be reverting to the one or one and a half percent rate that we had as recently as 2021."
Dodge addressed the public before the central bank's planned interest rate decision on September 6th, and a day before Statistics Canada's scheduled release of second-quarter gross domestic product numbers. Despite the anticipation of this important economic data, Dodge noted that the economy seems to still be producing more demand than necessary.
Dodge argues that certain economists and the wider market exhibit excessive optimism regarding the future trajectory of interest rates and the real interest rate. He noted that many individuals believe we will return to the pre-COVID-19 era, where the real interest rate hovered around zero.
"That's completely incorrect," he stated. "It won't occur once more, different factors will arise that will increase inflationary pressures in the future. This implies that central banks will have to adopt stricter measures compared to the period before COVID-19."
The Consequences of Federal Debt Management Expenses
Dodge stated that in the event of interest rates remaining elevated for a longer duration than expected, the federal government will experience the repercussions of increased expenses associated with servicing its debts.
According to him, the most recent national budget assumed that the government's expenses for repaying its debts would be around nine percent of its total income. However, he believes that the actual value will likely be closer to eleven percent or even higher.
"They will need to carefully strategize for increased expenses related to debt service, which are higher than what Finance Minister Chrystia Freeland anticipated in her budget," he stated. "Consequently, the government will have limited flexibility to undertake additional initiatives."
