Former Bank of Canada Chief Sits on Cash, Waiting for Bonds to Tumble

(Bloomberg) — Former Bank of Canada Governor David Dodge says interest rates are bound to stay higher for longer, despite market bets that the central bank will lower borrowing costs later this year.

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“Traders have got it all wrong. I’m sitting with a lot of cash in my personal accounts at the moment, just waiting for those long rates to go up — not down,” Dodge, who was the governor from 2001 to 2008, said in an interview.

The 79-year-old economist, now a senior adviser at law firm Bennett Jones in Ottawa, says the global economy is entering a new phase where real interest rates and inflation are higher. For Canada, he sees “either excess demand or deficiency of supply” exerting more upward pressure on consumer prices than expected through 2024.

“There’s a lot of uncertainty out there, and our advice as a firm to our clients is don’t make all your plans on the assumption that you’re going to go back to a pre-Covid world, either on interest rates or in policy terms,” Dodge said. “Even if you use that for an optimistic case, you better hedge somehow against the potential for considerably higher interest rates.”

The Bank of Canada held the benchmark overnight rate at 4.5% in March, and policymakers led by Governor Tiff Macklem are expected to keep it there on Wednesday, even as economic growth and the labor market surprise to the upside.

Inflation has been cooling and officials expect it to return to the 2% target next year. Some traders are betting the central bank will cut rates by December, and bond yields have fallen quickly. The Canada 30-year benchmark closed Tuesday at 2.999%, down more than 30 basis points since early March, while 10-year and two-year yields have dropped even more as the market bets on easing price pressures.

Dodge has his doubts.

“I find it difficult to think that we’re going to get there on a sustainable basis at the end of 2024 without some higher unemployment along the way or without some magic rebound in productivity,” he said. “Immaculate disinflation is a strange word. But there’s a lot of underlying sense in it that it’s very hard to think that we’re going to somehow quickly get back to 2% on a continuing basis.”