Farm Credit Canada (FCC) is projecting significantly lower interest rates by the end of 2025.
In a macroeconomic snapshot released Wednesday, FCC senior economist Graeme Crosbie said the federal ag lender is expecting the Bank of Canada’s key overnight lending rate to fall to 3.75% by the end of this year, before settling at around 2.5% by the end of next year. Following its third straight quarter point reduction this week, the Bank’s rate now stands at 4.25%.
A policy rate of 2.5% by the end of 2025 seems plausible, Crosbie said, because it falls within the range of what Bank of Canada economists consider a “neutral rate of interest” - generally considered to be somewhere between 2.25% and 3.25%. A neutral rate of interest is considered the point at which the rate neither stimulates, nor impedes economic activity.
FCC’s interest rate forecast for 2025 is also in line with the so-called real interest rate, which is the current stated Bank rate minus the inflation rate. In this case, the Bank’s rate of 4.25%, minus the July headline inflation rate of 2.5%, puts the real interest rate at 1.75% - the highest since before the 2008 financial crisis
“To rekindle economic growth, the Bank of Canada will have to engineer a much lower real interest rate,” Crosbie wrote.
By bringing down the overnight rate to around 2.5% by end of 2025, and assuming a stable inflation rate of 2% by then, that would imply a real rate of interest of 0.5%, which is roughly what it was before the 2020 recession, when Canada was registering decent GDP growth.
Still, Crosbie admitted FCC’s outlook is subject to numerous variables.
The forecast of the overnight rate settling at around 2.5% by the end of 2025 assumes a soft landing for the Canadian economy, a scenario whereby inflation is brought under control without causing significant economic damage.
“That said, given the many risks hanging over the Canadian economy, including global trade, a stretched consumer, and a jittery housing market, we acknowledge the possibility of a deeper downturn than what we’re currently anticipating,” he said.
Should that undesirable scenario materialize, the Bank would then bring down the overnight rate well below the estimated neutral rate to provide economic stimulus, as it did during the recessions of 1991, 2009 and 2020, Crosbie said.
