TD’s chief economist on where rates, housing markets and crude oil prices will be heading next

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The remaining months of the year may create significant volatility in markets. Economic data will be a focal point for investors along with the U.S. election.

On Thursday, the U.S. Federal Reserve will announce its rate decision. As of Monday, the market was pricing in a 99-per-cent chance of a 25-basis-point cut. However, there is greater uncertainty surrounding the Bank of Canada’s rate announcement decision at its Dec. 11 policy meeting. According to LSEG markets data, there is a 56-per-cent probability of a 25-basis-point cut and a 44-per-cent probability of another 50-basis-point cut.

The Globe and Mail recently spoke with Toronto-Dominion Bank TD-T chief economist Beata Caranci to help unpack the potential future path for interest rates and the implications for the Canadian economy.

An expanded version of this Q&A is searchable on The Globe and Mail website.

In Canada, real GDP was unchanged in August and the flash estimate, or preliminary reading, for September was 0.3 per cent. Given the lack of economic growth, what do you believe is the probability that we will see another 50-basis-point cut announced at the next meeting?

From my perspective, it’s really a matter of how they do the risk assessments. We will get an employment number out on Friday. If that holds up well, they can, in my opinion, do a 25-basis-point cut. If employment is not holding up well, then they have a fairly decent argument to continue on with a 50-basis-point cut.

However, I’m one of the few on the Street that has been pointing out that everything is a two-sided risk. They do run a very clear risk of repeating the errors of the past, which is in overly stoking housing demand and excitement back into that area because we know with absolute certainty there’s a lot of pent-up demand out there – people having been pushed to the sidelines because they didn’t qualify for mortgages and now a lot of people are going to be able to qualify. They do have to be careful that they don’t fall into that trap again of lifting up the financial risks to Canada. We are at the very early stages of a deleveraged cycle and they can undo that quickly.

Right now, are you calling for 25-basis-point cuts by the Bank of Canada at each meeting until reaching 2.25 per cent in the fourth quarter of 2025?

We are.

When do you expect to see a meaningful impact to the Canadian economy from these rate decreases?

I don’t think we will see it until the first half of next year.

In a report that you published on Oct. 25, you said, “2025 could display a stronger response in housing demand as monetary and government policy collide into a one-two punch to unleash pent-up demand,” which, to me, was a very bullish statement. Your official call for home prices is an increase of 6.9 per cent in 2025. However, this statement seems to reflect much higher upside potential.

That would have been a forecast with the Bank of Canada moving in 25-basis-point increments. So, if they continue to move in 50-basis-point increments, we would be bumping up those numbers.

So, given that we’ve had one 50-basis-point cut, will your forecast be revised?

We’re going to be revising that up.

But, the flip side though is that the government has since cut immigration quite a bit more than we had expected so there’s a little bit of a counterbalance coming in there.

Now, the immigration cuts are going impact the rental market more, but it does put some balance a little bit back into the demand side of the equation. It’s not just the interest-rate profile that we’re thinking of. We may end up being very similar to what we were, but if they continue to do 50-basis-point cuts, there’s no question we would have to raise up that forecast.

What about your outlook for the Ontario condo market, which has been under pressure. Will a recovery in occur in 2025?

I think that demand will naturally start to come back. It is the lesser priced of the two markets, versus detached. So, what we typically see is if you were to take the ratio of a detached price to a condo, it’s like an elastic band, they only stretch so far apart and then you see demand switch into the cheaper and the more affordable one. So, I think that’s the dynamic that benefits the condo market at present. You could see sales rising but not prices in the condo market as that excess supply basically gets soaked up as we get through next year. So, it may not be a great market for the sellers. The price movement might be more of a 2026 story for condos or a second half of 2025 story.

I think the resale market on the detached market has the potential of being quite hot because that’s where supply is most thinly spread, and the interest-rate cuts really are going to make that market look more attractive as well as the government measures. So, we can see some significant sales and pricing activity shift into that market. The more that happens, the more affordable the condo market looks. So, you keep moving buyers between that affordability argument versus the desirability argument, which is more people desire detached.

You forecast the five-year government bond yield in the third quarter of next year to be 2.65 per cent and 2.6 per cent in the fourth quarter (current yield is approximately 3.06 per cent). Many homebuyers gravitate toward a five-year fixed mortgage so might there be further downside to fixed mortgage rates?

When you look at the yield curve, it’s already pricing in the descent of the policy rate so we may not get as much movement in that five-year. That’s why in the forecast when you go out, most of the movement is on the short end versus the medium term.

And to your point that people like that five-year term, you had mortgage rates sitting at around 2.4 per cent back in 2020. And as those roll over, they’re going to reset somewhere around 4 per cent. That’s about a 160-basis point adjustment for these mortgages. Mortgage rates have come down significantly so we’re not going to be seeing the financial stress from households that many anticipated was a risk last year at this time, which is a good news story for consumer spending.

And we estimate about one-fifth of mortgages coming due next year transacted at much higher rates because they took out one- and two-year terms in anticipation that rates were going to fall. These are people who bought in the last two years and they’re going to get huge savings in mortgage payments. They were transacting at numbers like six and seven per cent on a mortgage rate and they can now roll into a five-year at around 4 per cent, 4.5 per cent.

So, the risks as they look today compared to where we thought they’d be a year ago are so much more muted and it’s not a compelling argument for the Bank of Canada to do 50 to mitigate that risk any more.

When I think about the balance of our forecast, let’s take out U.S. elections because we have no idea what’s going on with tariffs on Canada, but the consumer we think is going to be in a much better position next year for Canada than this year and last year. And we know that Canadians have kept the powder dry. When you look at deposits, they are high. So, if you take the combination that they’re likely not going to see the reset that they most feared on their mortgages, there’s a chunk of them that are going to actually get cost savings because they’re in one to two year terms that are resetting, you have all this excess savings sitting there, and you have falling interest rates faster than we anticipated so this is a combination for spend.

Given all the points that you’re making about the consumer potentially gaining strength next year, I’m wondering if the Bank of Canada will go to the bottom end of their targeted neutral range of between 2.25 per cent and 3.25 per cent, and down to your neutral rate target of 2.25 per cent?

They would be aiming for 2.75, which is their middle of the range.

I think they’re going to come down to us because the immigration numbers, now that they’ve been cut that means their labour force growth numbers are going to have to be cut.

The argument for them having their neutral rate as high as it is was in part related to the fact that population growth was so strong in Canada but now that you’re taking away some of that advantage that lends itself to them lowering their neutral rate. And when you combine that with Canada’s poor productivity performance, which has been going on for several years so both of those, the actual productivity performance in the past three, four years plus the markdown in population growth suggests that they’re going to have to lower their neutral range, and it might look more like ours, which means more room for them to cut.

You mentioned immigration so let’s address it. What’s your take on the federal government’s recently announced changes to its immigration targets?

The non-permanent resident, they had already telegraphed and discussed.

The surprise element was really on the permanent immigration numbers coming down. I think many people were caught a little bit off guard by the fact that they readjusted that number mostly because it wasn’t telegraphed because so much of the discussion had been on non-permanent residents.

Given that they’ve done it, to me, this is not a permanent state. It sounds like this is about taking a pause after having severely overshot for so many years and putting so much pressure on the social system. So, in that respect, I agree that they needed to scale back.

Hopefully, what we do over the next few years as we try to recalibrate these numbers is put in the proper controls on monitoring and making sure we’re getting the best outcome for those immigrants who do come to Canada to be matched to their skills and employers properly because that’s obviously what was missing.

It’s very unusual that we had an immigration policy where we had this whole segment that nobody could keep track of and basically colleges and universities calling the shots on people coming in. It didn’t make any sense, not having appropriate housing and social systems for them. So, we’ve got to get that all back into balance.

It’s not just about getting the numbers back into balance, it’s also getting the process in which you monitor the effectiveness of policy into balance and making sure you have the right tools to do that.

In the U.S., 2.8 per cent real GDP growth was reported in the third quarter, down slightly from 3 per cent in the second quarter, but still very solid. Could this lead to a “slower for lower” outcome where the Federal Reserve takes a slower, gradual pace of easing monetary policy?

This is not an economy that is rolling over. This is one that really does defy expectations. It’s quite impressive.

The U.S. had the monthly data on spending that is behind the quarterly data. Again, spending exceeded survey expectations. So, what it’s telling you is the hand-off from September into the fourth quarter is a good hand-off for spending. Consumer spending might again be better than many people are expecting in the fourth quarter.

So, if anything, it gets harder for the Fed, although they did that 50-basis-point cut, it’s going to get really tough for them to justify ongoing moves of 50.

I think for them, 25 basis points is probably the best that you’re going to be able to see from them credibly without putting more pressure on their economy.

Now, the good news is they are really in a bit of a utopia world. They’re getting inflation subsiding with an economy that is a sturdy and so they’ve got the best of both worlds. Maybe their neutral rate is a lot higher than people think. Maybe they don’t need to go as low as people are thinking. Maybe they can stop at three-and-a-half or 4 per cent.

But they have, in the last couple of months, seen a little bit of stickiness on their inflation so the Fed is going to be a little bit wary of that. So, that puts them in the 25-basis-point camp for cuts.

Just to bring it back to Canada, if the Bank of Canada stays with the 50, I would not be surprised to see our loonie drop and might have a six handle on it. It’s going to really put a lot of pressure on the dollar for us.

If there was a Trump victory and he goes through with 10 per cent tariffs to Canada, TD Economics is forecasting real GDP growth to drop below 1 per cent. However, what are the odds that we don’t see a tariff and instead he plays it as a negotiation tool, a Trump card if you will, during the USMCA negotiations?

That’s what we’re thinking he will do. I think that’s the most likely scenario. This is a person whose objective is to get the best deal for the U.S. and also who is generally guided by the performance of the stock market. And if you put in a policy that causes the U.S. economy to slow down or absorb a lot of inflation, the stock market would not be performing well.

I have no doubt that he will come out with very strong statements and policies on tariffs, but he may put timelines in place, meaning, you have three months until this comes into place or six months until this comes into place and so forcing rapid negotiations and concessions by countries.

I think there’s a good likelihood he thinks through these factors because if you go after everybody simultaneously, this is going to be net negative for the U.S., become too disruptive to their supply chains, their input costs, and their consumer costs.

TD Economics provides forecasts for multiple commodities. Is there a particular commodity that stands out?

The forecast right now is for the oil market to be in excess supply as we move into 2025 off the combination of OPEC adding supply and ongoing supply by non-OPEC. And there’s a huge relief pricing in oil that Israel didn’t attack Iran’s oil reserves. So, I think there’s a few things at play from a geopolitical perspective, and then actual supply and demand dynamics. If you have a U.S. economy performing stronger than expected and that pulls up other global economies as a result, and China is now doing stimulus to their economy, it’s possible you can get upside to oil prices next year. I think that’s probably one that’s near bottom and likely to come off the bottom next year.

What’s your greatest concern for Canadian economic growth?

My biggest concern is that we stay in a productivity slump and continue to become less competitive to peers by not implementing the right policies to course correct. Unfortunately, weak productivity is pervasive, occurring in every industry when compared to the U.S.

I know governments would like to say let’s just put this single policy in place, but there’s not a one-stop solution. They really have to roll up their sleeves and go industry by industry to understand the problems because of complexity related to layers of bureaucracy, tax codes, regulations and corporate culture. In the case of residential construction, there’s been minimal innovation over decades, which is quite concerning.

We need to get Canadian businesses investing again and foreign companies seeing Canada as a great place to invest in.

This Q&A has been edited and condensed for brevity and clarity.