Interest rate cut | Canada held back by the Americans

Will fall, will not fall? Canadians are impatiently awaiting a reduction in the key interest rate from the Bank of Canada, a reduction seen as beneficial, particularly for the real estate market.

Unfortunately, we will probably have to be more patient than expected, although inflation has slowed, according to venerable expert Jean-Guy Desjardins, CEO of Fiera Capital. The reason ? Canada depends on the United States, where inflation remains high due to surprising economic growth.

“Personally, I think that the Bank of Canada will not initiate an interest rate cut in the short term without the United States also having reached a stage of monetary easing, or very close to it,” he said. he said Monday morning during a conference organized by the Institute on Governance (IGOPP).

The conference took place the day before the release of Statistics Canada’s inflation data for March, Tuesday, April 16.

The founder of Fiera Capital rarely speaks in public. His words are nevertheless followed, given the manager’s impressive career.

Jean-Guy Desjardins is one of the most successful financial entrepreneurs in Canada for a quarter of a century. Montreal-based Fiera has assets under management of more than $160 billion and its company has some 850 employees (by comparison, the massive Caisse de dépôt et placement has assets of $434 billion).

The businessman took over the management of Fiera in January 2023, although he is past the normal retirement age (he will be 80 next fall).

His well-structured speech on Monday demonstrates the opposite direction that Canada and the United States are taking in terms of economic growth and inflation.

In the United States, the economy is growing at a real rate of 2.5%, above its potential of 1.8% to 2%. Monthly job creation has been around 275,000 for a year, while the potential is 200,000.

This faster progression of American economic parameters is likely to increase inflation, which reached 3.5% in March compared to the same month of the previous year, against 3.2% in February. American wages, for their part, are increasing at an annual rate of 4.5%, above inflation.

The situation in Canada is quite different. The influx of immigrants increased the economy’s potential growth from 1.5% to 2.5%. However, the Bank of Canada estimates that real growth in the economy will be 1.5% in 2024.

The annualized inflation rate in recent months in Canada is also below the annual average, a sign of the downward trend in inflation, while the opposite is true in the United States.

“In the United States, no, the conditions are certainly not in place to justify the initiation of monetary easing (by the Federal Reserve). On the other hand, in Canada, yes, the economic characteristics are extremely favorable to monetary easing in June or July,” explains Jean-Guy Desjardins.

This difference in economic context risks postponing, if not reducing, the rate cut in Canada. Any interest rate cut here without an American equivalent risks putting downward pressure on the Canadian dollar. And this decline in the currency would increase the price of imports, which would fuel Canadian inflation.

“Will the Bank of Canada go against the positioning of the American central bank, with the implications of such a decision? », asks Jean-Guy Desjardins.

The CEO of Fiera still believes that the key rate will fall by 0.50 to 0.75 percentage points in Canada by the end of 2024 (it is currently at 5%). Meanwhile, the US Fed will opt for a cut of just 0.25 points.

And after ? According to Mr. Desjardins, the Canadian key interest rate will continue to fall in 2025 to reach neutrality from 3% to 3.25% towards the end of 2025, when inflation would approach 2%.

Meanwhile, the inflation rate will not fall below 2.5% in the United States until the end of 2026, and only in 2027 will the Fed’s key interest rate approach rate considered neutral of 3.25%.

For his part, the chief economist of the National Bank, Stéfane Marion, believes that the economic future has never been so difficult to predict, he said during his speech. Among the risks, there are obviously military conflicts, colossal American debt and the costly demands of decarbonization.

Securities are selling dearly on the stock markets, in particular because of the very high price-earnings multiples – too high – driven by the promises of artificial intelligence.

Desjardins is optimistic over five years

Despite economic uncertainties, Jean-Guy Desjardins is relatively optimistic, judging that our economy is at the start of a five to eight year growth cycle. “If I was working with a client to make an investment policy over a 5-10 year horizon, my most likely scenario would be relatively optimistic. »

In the shorter term, its US recession scenario is only 20%, compared to 50% for a soft landing. The probability of a return of inflation is estimated at 30%.

In short, the question arises: will Canada have to further reduce its interest rates and accept a weaker currency, once again, to revive its economy?