Canadian Underwriter

How long you might wait for interest rate hikes

July 12, 2019   by Greg Meckbach

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Interest rates in Canada won’t change for the next 18 months, but what happens after that is hard to predict, a Bank of Montreal economics expert suggested Thursday.

The Bank of Canada announced Wednesday it is keeping the overnight interest rate at 1.75%. Although this is 1.25 percentage points higher than two years ago, it’s still lower than normal because the overnight rate was 4.5% in 2007 and more than 20% in the summer of 1981.

Low interest rates make it harder than normal for property and casualty insurers to offset underwriting losses with investment income.

In the United States, the federal reserve will probably cut rates twice in 2019, Robert Kavcic, senior economist for BMO Economics, told Canadian Underwriter Thursday.

“The Bank of Canada is expected to sit on the sidelines and not do anything [for the remainder of 2019 and throughout 2020],” Kavcic said in an interview.

“You could probably argue, assuming the economy doesn’t roll over, by the time we get into 2021 and 2022 those rates could nudge up by another 50 or 75 basis points,” meaning half to three-quarters of a percentage point, said Kavcic.

The Bank of Canada predicts economic growth in Canada will be 1.3% in 2019 and 1.9% in 2020, down from its previous call of 2.1%, The Canadian Press reported Wednesday.

“Even just a modest recession could cause central banks to cut rates, which is not in the forecast right now because we don’t see that playing out at this point, but given where we are in the (economic) cycle, that is certainly a risk out there,” Kavcic said Thursday.

The Bank of Canada publishes what it calls a “neutral rate,” which Reuters describes as the interest rate that is required to keep the economy from running too hot or too cold.

Conventional wisdom is that if interest rates are too low, this can put an upward pressure on inflation. But as interest rates increase, investment in jobs and capital projects go down.

For 2021 and 2022, the Bank of Canada’s view is that the neutral rate is between 2.25% and 3.25%, Kavcic said. “You can debate whether that is right or not. We would probably argue [the neutral rate is actually] a little bit lower.”

The Bank of Canada raised its forecast for second-quarter growth to annual pace of 2.3%, up from its April projection of 1.3%, CP reported.

“However, the outlook is clouded by persistent trade tensions,” the central bank said. “Taken together, the degree of accommodation being provided by the current policy interest rate remains appropriate.”

South of the border, The Associated Press quoted Federal Reserve Chairman Jerome Powell as saying “many” officials with America’s central bank believe a weakening global economy and rising trade tensions have bolstered the case for looser interest-rate policies.

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