Rates likely to pause well below U.S. Federal Reserve's latest 4 per cent forecast
April 10, 2014
/CNW/ - While it's clear that interest rates are heading upward, a new report from CIBC World Markets finds that the hikes will be lower than in previous cycles and fall below what many, including the U.S. Federal Reserve, are predicting.
"The nature of the upcoming expansion will dictate that, even at full employment, U.S. rates will have to be lower than in past cycles, in both real and nominal terms," says CIBC Chief Economist
. "Similarly, Canadian overnight rates could end up reaching a plateau at surprisingly low levels."
The report, co-authored by Mr. Shenfeld and CIBC Senior Economist
, shows that in both countries, the neutral rate - the level at which interest rates neither stimulate nor restrain economic growth - could be only 2.5 per cent, well below the 4 per cent the Fed forecast at its latest meeting.
Mr. Shenfeld says that both
and the U.S. are headed for substantially slower growth in the working-age population, decelerating to less than half the pace seen in the last expansion. Unless productivity soars, he says the pace of potential (non-inflationary) real GDP growth will also decelerate. In addition, lacklustre capital spending and increased savings rates - particularly in emerging market economies - puts a further damper on the prospects for economic gains.
The report notes that former U.S. Treasury Secretary
sees these factors driving industrialized countries, including the U.S. and
, towards "secular stagnation". He is calling for the use of ramped up debt-financed infrastructure spending as an alternative to another housing bubble to get the U.S. economy back on track. But for Mr. Shenfeld, maintaining a lower path for interest rates, and for
, keeping its more competitive exchange rate, will also be key.
"If we don't turn to larger fiscal deficits, monetary policy will have to provide enough of an offset to those drags on growth. Ensuring that the interest rate differential with the U.S. stays narrow enough to keep the Canadian dollar at a level competitive for exporters will allow the economy to tolerate the end of the housing boom," he adds.