📝BoC’s Current Period Of Rate Restrictiveness Longest Since The 1990s: RBC

The current expectation for the overnight rate to start edging lower this year before returning to a “neutral” level in 2025 will mark the first time since the 1990s that the key rate has been held in a restrictive territory for nearly two years since it started rising in March 2022. Central banks typically respond quickly with lower interest rates once labour markets start to soften. But the start of rate cuts in Canada that we expect in June would mark more than a yearsince the unemployment rate started to rise in the spring of 2023.

The longer reaction time (relative to that softening economic backdrop) has been due to a couple of factors. The BoC hasn’t needed to be this worried about inflation for decades, and part of the plan to bring inflation lower included cooling off overheated labour markets. Also, the increase in the unemployment rate is more due to longer job search times as labour supply growth outpaces hiring demand instead of outright layoffs.

Expect the neutral policy rates - the level of interest rates needed to maintain inflation at 2% to have in- creased in Canada and the U.S., and anticipate the overnight rate to be lowered to 3%, and the Fed funds range at 3.25%- 3.5% sometime in 2025.- RBC