Pre-pandemic interest rates doubtful, says former Bank of Canada governor
A former governor of the Bank of Canada believes that the possibility of interest rates returning to their pre-pandemic range of 1% to 2% is unlikely.
In an interview with BNN Bloomberg, ex-governor David Dodge expressed skepticism about the possibility of any interest rate reductions occurring before 2024 concludes, at the earliest.
Dodge, presently serving as a senior consultant at Bennett Jones, expressed his anticipation that Canadians will witness a slight decrease in interest rates from the current 5% by 2025. However, he anticipates that these rates will still remain higher than those observed in earlier periods, projecting them to hover around 3.5%.
According to Dodge, during a recent television interview, we should not expect a return to the approximately 2% interest rate at the Bank of Canada which was prevalent in the decade preceding COVID-19.
"And there's definitely no chance of reverting to the meager 1% or 1.5% levels we experienced just last year in 2021."
The Bank of Canada is set to unveil its most recent verdict on interest rates on September 6.
Furthermore, Statistics Canada has plans to unveil their second-quarter gross product figures a day prior.
Dodge stated that there seems to be a surplus of demand in the economy, but the forthcoming economic data will provide a better understanding of the future outlook.
The ex-governor holds the belief that numerous economists have an excessively positive outlook on the future of the economy, particularly in thinking that we will return to the nearly nonexistent interest rates seen before the pandemic. Dodge stated that many individuals have a fundamental assumption that we will revert back to the time period prior to COVID-19.
"Dodge disagreed and stated that it would not happen again. He explained that there are various factors that will increase inflation in the future, which will require central banks to implement stricter measures compared to the time before the COVID-19 pandemic."
According to Dodge, if the interest rates persist at elevated levels beyond the current forecasts, the federal administration will confront increased expenses associated with servicing its debt.
According to the latest national budget, the projected expenses for servicing debt would be approximately 9%. However, as per Dodge's calculations, it is anticipated to be around 11% or potentially higher.
“They will need to prepare for increased expenses related to servicing their debt, which will surpass the amount anticipated by Finance Minister Chrystia Freeland in her budget,” stated Dodge. "Consequently, the government will have limited resources to allocate towards other endeavors."
