Derek Holt of forecasts a four percent interest rate by the end of 2024, with more cuts in 2025
Derek Holt, vice-president, and head of capital markets economics at the Bank of Nova Scotia, spoke with Financial Post’s Larysa Harapyn about the future of the Bank of Canada's policy interest rate.
Holt forecasts the rate to be four percent by the end of 2024, with additional cuts anticipated in 2025.
The Bank of Canada will announce its next rate decision on Wednesday, July 24. Markets expect another quarter-point cut, Holt said.
In the interview, Harapyn noted the European Central Bank's recent decision to hold interest rates, awaiting more data before making any policy changes. She mentioned the dip in headline inflation and recent Canadian inflation data from June, prompting calls for a rate cut from the Bank of Canada.
Holt agreed, stating, “I think another quarter point rate cut is broadly expected from the Bank of Canada on Wednesday. It's priced into the markets, pretty much entirely priced, maybe a basis point or two away from a fall quarter point, and most within consensus expecting a cut again.”
Holt discussed the Bank's shift to a more forward-looking approach, aiming for a sustainable two percent inflation rate next year.
He noted, “They're less focused upon the most recent inflation data. If there were more adherence to that recent inflation data, then I think they would probably be a little bit concerned by the fact that some of their core measures are still hot in a month-over-month sense over the past couple of months.”
Harapyn asked Holt to unpack recent inflation numbers, particularly in the housing sector. Holt explained that core inflation measures have risen significantly in the past two months.
“The last two months have seen their preferred trimmed mean and weighted median core measures of inflation coming up 4.1 percent month-over-month at an annualized pace two months ago, and almost 3 percent in the latest month,” he said.
When discussing Canada’s economic outlook and interest rate relief, Holt stated, “We forecast the Bank of Canada to cut by a full percentage point this year, including the June rate cut. By the end of this year, we should have a policy rate at 4 percent compared to the 5 percent peak, and additional cutting next year.”
He mentioned that the impact on mortgage rates is already reflected in the five-year government bond yield, driving fixed mortgage rates.
Regarding the International Monetary Fund’s statement about Canada achieving a soft landing, Holt agreed.
“I think we're definitely at a soft landing. Scotiabank Economics has always been in a soft-landing camp for the Canadian economy. We had 3 percent quarter-over-quarter consumption growth in inflation-adjusted terms in each of the past two quarters,” he said.
Finally, Holt addressed the potential risks to the Canadian dollar if the US Federal Reserve cuts rates.
He stated, “We have the Federal Reserve cutting in September. We think that they'll make enough progress by then. The Bank of Canada needs that. There's a limit to the extent to which the Bank of Canada confronts the Federal Reserve and undercuts the policy rate of the Federal Reserve.”
Holt warned that significant currency depreciation could limit the Bank of Canada's ability to cut rates next year.
