First some context…
Unless you believe fervently in Dr Who or Marvel character Loki’s time travel, you’ll know no one can really predict the future. But rewind to the end of 2022 and analysts were forecasting recessions, hard landings, and interest rate cuts. They never happened.
Instead, here we are, the TSX is up about 8% and the S&P 500 an eye-catching 21%, the economy has proved resilient, and many well-paid economists are admitting they got it dead wrong. But what’s next?
First, let’s address a common misperception that central banks want to cut interest rates asap and return them to “normal” levels of 0-1%.
News alert: those historical lows we all got used to post the global financial crisis are the exception not the norm.
Indeed, you have to go back to between 1935 and 1955, when the Bank of Canada kept the benchmark rate between 1.5% and 2.5%, to see similarly low rates.
By 1965 the overnight rate had seesawed its way to 4% but didn’t dip under that mark for 29 years, until January 1, 1994. It was only when the housing crisis of 2008 arrived that Canada’s rate subsequently plunged to 0.25%. Even taking these rock bottom rates into account, the Bank of Canada’s benchmark rate averaged out at 5.78% from 1990 until 2023, reaching an all-time high of 16% in February of 1991 and, as mentioned, a record low of 0.25% in April of 2009.
In Part 2, we’ll briefly examine the recent circumstances, explore popular opinions, and, most importantly, assess the conditions necessary for those opinions to be accurate. Additionally, we will identify potential obstacles that could stand in the way.
