Neutral interest rates are coming every Canadian’s way, but will it be the new normal or just a fleeting thing? Bank of Canada governor Stephen Poloz says interest rates may still fluctuate, but he’s certain that they would be significantly lower than prior the financial crisis.
Poloz made the statement during a Q and A session after his talk on global trade growth and he added that it could be an effect of the lower forecast for long-term global growth. He also added that the interest rates can even go lower if present conditions are to continue and said those that are involved in the pension business needs to adapt to it or get used to it. Needless to say, he believes that neutral interest rates are here to stay for quite some time.
The Effect on Pension Funds
From the time of the 2008 global financial crisis, the world’s pension funds had to deal with uncertainty, record-low interest rates, and feeble growth. This is because pension funds have to use long-term interest rates to calculate their future expenses or liabilities. Lower interest rates mean the pension provider has to have more money to be able to pay future benefits. The Organization for Economic Cooperation and Development reported late last year that conditions now give them doubts whether annuity schemes and defined-contribution systems can deliver adequate pensions later.
What Can We Expect?
The shock of lower commodity prices can have an adverse effect on the Canadian economy so to Poloz lowered the central bank’s key rate to just 0.5%, still a bit above the historic low of 0.25% but still very low. This is to cushion the Canadian economy. He says that the higher neutral rate in the past is linked to the baby boom era, a 50-year period of more labour-force participation and overall better growth. He quickly added that that period is over during a meeting between the Securities Industry and Financial Markets Association and the Investment Industry Association of Canada.
It should be noted that with all these unpredictability, Poloz still says that current headwinds can still cause a positive change wherein interest rates will go back to more normal levels as it was prior to the financial crisis.
Poloz touched on an important topic on his speech. He says that the rapid pace of trade growth prior to the crisis isn’t likely to happen soon. However, he remains optimistic, saying that he’s not seeing any sign of a looming global recession. If any, he expressed confidence that the current trade slow-down can be slowly reversed as the global economy recovers – and he knows what he’s talking about, being a former CEO and president of Export Development Canada.
Poloz further shared that current signs point to the global economy having reached a balance point, something that has a positive outcome in the future.
As for the overall export of Canadian goods and services, EDC chief economist Peter Hall predicts an expansion of 2% for this year, as compared to 7% last year. It does look like that a slowed-down growth and a lower interest rate is the new norm, isn’t it? We’ll let time decide on that.
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