Interest rates are unlikely to drop back down to their pre-pandemic levels of 1% to 2%, according to a former Bank of Canada governor.
Former governor David Dodge told BNN Bloomerg that he doubts any rate cuts will come before the the end of 2024, at the earliest.
Dodge, who is now senior advisor at Bennett Jones said that while Canadians can expect to see interest rates to “come down a bit” from the current 5% in 2025, he believes that it will remain higher than levels of previous decades, predicting it will stay around 3.5%.
“We’re not going back to the (around) 2% interest rate at the Bank of Canada that we enjoyed in the 10 years leading up to COVID-19,” said Dodge, in a television interview.
“And we’re certainly not going back to the 1% or 1.5% that we had as recently as 2021.”
On Sept. 6, the Bank of Canada is scheduled to announce its latest decision on interest rates.
Additionally, Statistics Canada is set to release their data on second-quarter gross product figures the day before.
Dodge said that the economy looks to be still generating excess demand however the expected economic data will help paint a clearer picture of what’s to come.
The former governor believes many economists hold a view that is too optimistic of the economy’s future when it comes to thinking that we’re heading back to the near zero interest rates prior to the pandemic. Dodge said that the “basic assumption that a lot of people make is that we’re going back to pre-COVID-19 times.”
“That’s just wrong,” said Dodge. “It will not be the case again, there are all sorts of factors that are going to push up pressures on inflation going forward, which means the central banks are going to have to be tighter than they were in the pre-COVID-19 period.”
If the interest rates remain at high levels past what is currently being predicted, the federal government will be faced with higher debt servicing costs, according to Dodge.
The most recent federal budget estimated debt services costs would hover around 9%t but by Dodge’s calculations, it would likely be closer to 11%, or maybe even more.
“They’re going to have to plan for higher debt service costs than (Finance Minister Chrystia Freeland) planned in her budget,” said Dodge. “That means that there’s going to be less room for the government to do other things.”