Rosenberg Urges Bank of Canada to Begin Cutting Rates Immediately

The Canadian economy is facing a significant challenge as key data points indicate that the central bank is keeping policy “far too tight.” Inflation metrics, such as the CPIX, are running at 2.1 percent on a year-over-year basis, which is barely higher than the pre-COVID-19 trend and less than half the pace of a year ago.

The retail price index has gone from over two percent a year ago to flat today, indicating a lack of pricing power in the Canadian retail sector. Real GDP growth in the past year is at 0.9 percent, with the unemployment rate at 6.1 percent, higher than pre-COVID-19 levels.

The Bank of Canada’s estimate of potential non-inflationary growth is 1.8 percent, but the economy is running at half that pace, leading to a risk of homegrown deflation due to excess capacity. Producer prices in Canada are running at negative rates due to an excess of supply over demand.

The Bank of Canada is keeping policy too tight, with interest rates higher than necessary. Canadians are spending 15 cents of every after-tax dollar on debt service, signaling a cycle of debt deleveraging and defaults.

The message is to go long on the Government of Canada bond market, with yield declines expected at the front end of the curve. Interest rate differentials in favor of the U.S. dollar will keep the Canadian dollar under pressure, benefiting exporters and tourist operators.

Overall, the Canadian economy is facing challenges due to tight monetary policy, excess capacity, and high debt levels, signaling a need for a more accommodative approach from the central bank.