One prominent Bay Street economist says the Bank of Canada should have cut interest rates this week to stimulate an economy that he sees as heading towards a recession.
The central bank elected to hold its key policy rate at 2.75 per cent for the second consecutive decision on Wednesday. Bank of Canada Governor Tiff Macklem said monetary policy makers came to a consensus to leave the rate unchanged and wait for more information on how tariffs will impact the economy. Specifically, Macklem said new 50 per cent duties on steel and aluminum imports, that came into effect Wednesday, showcase uncertainty regarding U.S. trade policy.
David Rosenberg, the founder and president of Rosenberg Research, said in an interview with BNN Bloomberg Thursday, “What the Bank of Canada should be doing if you want to find out the best way to protect the Canadian economy in this bug of uncertainty, is just stimulate the economy. And the Bank of Canada really has one tool which is interest rates…they already took out insurance policies on the future of the economy, I don’t know why they’ve stopped.”
He highlighted that he didn’t expect a cut on the day of the announcement, since the central bank didn’t signal anything prior for markets to price in. Rosenberg added it should have done so to get ahead of any economic downturns.
Given the current economic environment, he said central banks should be forward looking and he can understand the degree of uncertainty the bank faces. While interest rates are relatively low, Rosenberg said they are “clearly not low enough.”
“Inflation is not a problem, we had a couple of above expected prints, underlying inflation, headline inflation has come a long way down from where it was at the peak, but here’s the problem is that it’s a lagging indicator. The Bank of Canada, and I’d say even more so for the Fed, they are focused on contemporaneous and lagging indicators,” he said.
Rosenberg said unemployment is nearly two percentage points higher over the past two years, edging up against seven per cent, while the central bank has a single mandate to maintain price stability.
“The unemployment rate is going up and the rate of change in the unemployment rate, which is more important than the level, is telling you that there’s an 80 to 90 per cent chance this economy is slipping into a recession,” he said.
Amid some calls for Canada to match U.S. tariffs, Rosenberg said that is counterproductive.
Rosenberg added that the common definition of a recession, two quarters or six months of negative economic growth, is just a “rule of thumb.” He added the “finial arbiter of the recession call in Canada” is the C.D. Howe Institute, which has different measures of severity including mild, medium and severe.
