The former governor of the Bank of Canada says he expects inflation will drop quicker than many are predicting and that real interest rates will remain low in the long term.
Stephen Poloz shared his economic outlook during a keynote presentation at the CropConnect Conference in Winnipeg on Wednesday.
Many of the economic parameters that central bankers look at — high job vacancies, quantitative tightening, advancements in technology — are deflationary and moving the economy in the same direction as higher interest rates, he noted. “I think inflation will fall a lot faster than most expect.”
Coinciding with declining inflation, he also expects real or inflation-adjusted interest rates will remain low in the long term, mainly due to slowing workforce and global economic growth as baby boomers retire.
“In most economists’ models, that real rate of interest is roughly equal to the global rate of growth, possibly adjusted for productivity changes, which can be different country to country. And so what that means is if the rate of growth in the global economy is trending down because we’re producing fewer workers, which we are, then so will the real rate of interest,” Poloz says, in the audio below. “It’s popped up right now, but that’s a bit of a cycle going on. So once it settles down, my guess is it’ll be low and possibly gently trending downwards.”
In other words, he expects the rate of return on money that’s invested to settle around 1 per cent after inflation is subtracted from nominal interest rates.
“You’ve got 2.5 to 3% nominal. That’s kind of normal if you have 2% inflation,” he explains. “If I’m right, then over the next five to 10 years that rate just ticks down, maybe .1 or .2 per year or point two per year, it’s not fast, it’s not a lot.”
“I think we’ve lived through the big change in demographics. So real interest rates were low in the 50s, and 60s, and shot up for the 70s and 80s. And for 40 years they’ve been coming down. That’s because the baby boom, that’s how long it is. And we’re on the tail end, it should look almost the same. And I think so far, it’s it’s pretty close to what’s happening.”
Poloz also argued against the narrative that the world is entering a period of widespread de-globalization. “De-globalization and friend-shoring — it doesn’t apply to agriculture,” he said.
Listen to some of Stephen Poloz’s comments on interest rates and more, following his presentation at CropConnect: