Big interest rate cuts ahead from the Bank of Canada if 2001 is any indication
They say that actions speak louder than words, and this definitely applies when it comes to the Bank of Canada.
The central bank now forecasts the consumer price inflation (CPI) index will return to two per cent in mid-2025. If this two-year prediction causes you concern that policymakers won’t be lowering rates for two years, fear not. It is quite amazing that they feel confident in making a prediction for two years out. Keep in mind that only 18 months ago, the overnight rate was still 0.25 per cent.
Two years is forever in terms of economic predictions, and, as a result, we should assume virtually nothing based on the prediction of a two-per-cent CPI by mid-2025.
To show what I mean, let’s take a closer look at the last time interest rates were this high, which was in 2001.
As 2000 turned to 2001, the Bank of Canada’s rate was at six per cent. It is 5.25 per cent today. Back then, real gross domestic product (GDP) was growing by 4.7 per cent and employment was rising by 2.6 per cent. Higher energy prices were boosting exports. There was growth in employment and wages and, together with tax cuts, this grew consumer spending.
To help deal with an overheating economy, the Bank of Canada began raising rates, starting in 1999, and peaking with a 50-basis-point hike in May 2000 to get to six per cent.
However, all was not rosy. The tech bubble burst in early 2000, and the end-of-year forecasts for 2001 were not great. GDP growth was expected to slip to between two and three per cent, according to private-sector forecasts. Among the concerns were the effects of previous increases in interest rates, higher energy prices and overall weakening confidence.
As it turned out, Canada’s GDP dropped all the way to 1.79 per cent in
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