Former BoC governor Mark Carney warns of ‘slower and shallower’ rate cuts

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Former Bank of Canada governor Mark Carney warned that central banks may cut interest rates more slowly and by less than many expect, as monetary policy adjusts to a new era defined by structurally higher inflation.

Speaking at an event in Ottawa on Monday evening, Mr. Carney, who after leaving his post at Canada’s central bank in 2013 served for nearly seven years as governor of the Bank of England, said central bankers are likely to start lowering interest rates this year as inflation continues to decline.

“But expect those cuts to be slower and shallower,” he said, adding that rates are unlikely to return to prepandemic lows. “What’s more relevant for most companies and individuals and households is that, in the medium-term, rates are going to be higher, and are going to be higher because of structural things.”

Bank of Canada expected to hold rates, but could signal policy shift

This echoes remarks by current Bank of Canada Governor Tiff Macklem. When asked about the likely trajectory of rate cuts after the bank’s last rate decision, in March, Mr. Macklem said that “it’s very safe to say we’re not going to be lowering rates at the pace we raised them.”

The Bank of Canada’s next rate decision is on Wednesday. Most analysts expect the central bank to keep its benchmark rate steady at 5 per cent for the sixth consecutive time, although they’re watching for a shift in tone that could set the stage for rate cuts over the summer. The central bank began rapidly hiking its policy interest rate in March, 2022, as part of an effort to cool the economy and control inflation.

Interest-rate swap markets, which capture market expectations about monetary policy, are pricing in three rate cuts this year, likely starting in June, according to Refinitiv data.

Mr. Carney, who is now head of impact investing at Brookfield Asset Management and chair of Bloomberg LP, avoided commenting on near-term policy choices – to cut or to hold – faced by the two central banks he used to lead.

But he spoke about the structural changes in the global economy, which he said mean inflation will probably be “higher and more volatile” than in recent decades. These include a fracturing of global trade, increased geopolitical risks and the transition to a low-carbon energy system, all of which point to rising prices, particularly for imported goods.

“We’ve gone from a system, a global economy that was for 25, 30 years steadily integrating,” Mr. Carney said. “It had lots of problems that later manifested, but one of the things that it did give is steady disinflation and prices coming down.”

These changing dynamics could show up in the Bank of Canada’s updated estimate of the “neutral rate,” which is expected to be published Wednesday.

The neutral rate is the bank’s estimate of where its policy interest rate should settle if the bank is trying neither to stimulate the economy nor restrain it. The neutral rate is determined by slow-moving forces such as demographics and patterns of savings, trade and investment.

The current estimate puts the neutral rate between 2 per cent and 3 per cent. But several top Bank of Canada officials have suggested over the past year that the real range is likely higher, and many Bay Street analysts expect the bank to raise the estimate by at least a quarter percentage point on Wednesday.

Much of Mr. Carney’s speech, which was hosted by Canada2020, a progressive think tank with ties to the Liberal Party, focused on broader economic themes. Mr. Carney, who is often touted as a potential Liberal leader, said that the country faces a number of pressing challenges tied to low productivity, changing technology and an increasingly hostile global trading environment.

Without explicitly criticizing the current government, he said the changing economic environment would “demand fiscal discipline and a relentless focus on delivery, rather than a spending reflex that only treats the symptoms but does not cure the disease.”

“When we’re debating the competing priorities here at home, we should first acknowledge that we have less to spend because we’ve become less productive,” he told the audience, which included Liberal members of Parliament.

“And unless we turn that around, Canadian prosperity will be severely compromised. We can’t redistribute what we don’t have.”

He said he welcomed the government’s recent announcements ahead of the April 16 budget, which have included billions in promised new spending, focused mainly on housing. But he also suggested that some of the government’s recent economic policy measures have been wrong-headed.

“I suggest maybe we could swap that next battery plant for a million home heat pumps,” he said, referring to the more than $40-billion worth of federal and provincial subsidies given to electric-vehicle manufacturers to establish plants in Canada.

On the broader question of climate policy, Mr. Carney, who is the United Nations special envoy on climate action and finance, said he supports a call from Alberta Premier Danielle Smith for a First Ministers’ meeting. But he said the discussion should go beyond a debate over the federal carbon levy.

If provinces want to do away with existing climate policies, he said, “they need to put something else in that’s at least as effective and it needs be transparent from the start.”