Governor Tiff Macklem of the Bank of Canada, in a recent interview with BNN Bloomberg signalled a potential shift in monetary policy, with rate cuts anticipated in 2024. This change hinges on witnessing a consistent decline in core inflation over several months. It is a slight shift in tone from his speech last week where he said it is too soon to consider dropping the bank’s policy rate, a statement given in response to growing consensus that a rate drop is likely to happen in March or April 2024.

Aligning with Global Trends

In aligning with global financial trends, the Bank of Canada’s stance mirrors the Federal Reserve’s approach in the United States. The Federal Reserve has also indicated a potential shift toward lowering interest rates as inflation rates approach their targets. This reflects a broader consensus among major central banks on adapting monetary policies in response to evolving economic conditions.

“We are seeing strong growth that … appears to be moderating. We are seeing a labor market that is coming back into balance … We’re seeing inflation making real progress,” US Federal Reserve Chief Jerome Powell told reporters. “These are the things we’ve been wanting to see … Declaring victory would be premature … But of course the question is ‘when will it become appropriate to begin dialing back?'”

Economic Indicators and Forecasts

The Bank of Canada, observing a slowing in core inflation rates, sees potential for rate cuts, but not immediately. In October, key inflation measures fell within the bank’s target range for the first time since early 2021, suggesting a cooling economy. However, Governor Macklem emphasizes caution, stating: “We are certainly feeling more confident that monetary policy is working… We’re not there yet. There are a few more things we need to see to be more confident that we’re headed back to 2% and we’re watching those closely.” Rate cuts, while anticipated by the market as early as April, are contingent on further economic indicators.

image source: Bloomberg

Monetary Policy Effectiveness & Market Reactions

Macklem acknowledges the effectiveness of current monetary policies in steering towards the 2% inflation target. However, he maintains a cautious stance, indicating that certain conditions must be met before confirming a definitive path back to this target.

The market, in anticipation, has begun pricing in potential rate cuts as early as April 2024. This reflects the growing confidence in the Bank’s strategy to achieve inflation control.

The Future of Interest Rates

Governor Tiff Macklem’s view is that borrowing costs are unlikely to return to their pre-pandemic lows. This is shared by several experts in the field. A comprehensive analysis reveals a consensus among economists and financial advisors that the era of ultra-low interest rates is likely over.

image source: Trading Economics

Many experts agree and believe that interest rates will not revert to the near-zero levels seen in the aftermath of the 2008 financial crisis. Independent financial advisers and mortgage brokers echo this sentiment, predicting that the lowest interest rates might reach around 2.5% but are unlikely to go any lower. They argue that rates any lower would not be effective as a tool in economic emergencies. Moreover, ultra-low rates could potentially fuel an overheated housing market, making properties even more unaffordable, particularly for first-time buyers​​.

Furthermore, a study by the economist Claudio Borio and colleagues at the Bank for International Settlements questions the traditional models used by monetary policymakers, suggesting that real interest rates are primarily a product of where central bankers set the rates, rather than being solely influenced by economic factors like savings and investment decisions. This perspective supports the notion that the era of ultra-low interest rates was more of an anomaly and less likely to be repeated in the near future​​.

Overall, these insights indicate a shift in the global financial landscape, with a gradual move away from the exceptionally low interest rates that characterized the post-2008 period. This aligns with Macklem’s view that we are unlikely to see a return to those very low rates seen in the past decade.