The endpoint could be coming into view – but more rate moves are on the way, says economist
Bank of Canada rate hikes have dominated headlines throughout 2022 where the housing and mortgage markets are concerned – but last week’s announcement on its overnight rate was noteworthy only for how unsurprising it was, according to BMO’s chief economist.
Doug Porter (pictured) told Canadian Mortgage Professional that the central bank’s September 7 decision on its trendsetting rate, a 0.75% jump, was “right down the middle of the plate” with little to raise the eyebrows of market observers or analysts.
That was largely in line with the Bank’s tendency to keep September statements terse and to the point, according to Porter, marking a stark contrast with an unexpectedly large rate hike of 1% in its previous decision in July.
“The rate hike itself was basically what the consensus of economists and markets had settled on as being the most likely, so I think that’s kind of interesting unto itself: after the surprise in July, that the Bank of Canada did pretty much what everyone was expecting,” he said.
While the Bank played down recent underwhelming GDP growth and highlighted robust consumer spending, it also effectively dismissed the notion that it might hit pause on its rate-hiking trajectory, flatly stating that its governing council deemed the policy rate would need to rise further.
Still, Porter said that blow was softened somewhat by the caveat in the central bank’s statement that it would be assessing how much further interest rates needed to rise, which he said indicated that the end may be in sight for rate hikes.
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“At least they’re suggesting the endpoint is coming within view in terms of the rate increases,” he said. “Frankly, I don’t think the Bank knows for sure how far they’re going to have to take interest rates.
“A number of commentators suggested that basically what they did was give themselves some flexibility here. The language was not so pinned down that they have no options – they can basically watch how the… inflation data comes in, and they have flexibility to decide what to do next.”
The market was largely unmoved by last week’s decision, with little if any discernible change in Canadian bond yields as a result of the hike.
In historical terms that was significant, Porter said, especially because the so-called “oversized” rate hikes introduced by the Bank of Canada this year – increases of more than a quarter point – are so rare.
“The Canadian dollar did end up strengthening a little bit on the week, but that was more because the US dollar itself retreated a bit from 20-year highs earlier in the week,” he said. “It’s pretty rare for the market to yawn at such a big interest rate increase.
“After all, this was the second-biggest increase we’ve had in decades from the Bank of Canada, yet there was almost no market reaction. So obviously this was very much as expected. It shows how the market has become almost numb to these very weighty increases in rates.”
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That’s particularly intriguing, according to Porter, because after 20 years of nothing higher than a quarter-point hike, it’s become the norm in 2022 to see not just fifty-percentage-point increases, but even three-quarter-point jumps “barely make a ripple in the market.”
In a note to clients at the end of August, Porter said the Canadian housing market was entering “bear territory,” with the inventory of unsold homes ticking upwards across the country and the ratio of sales to new listings also plummeting.
Little has changed on that front in the wake of the central bank’s latest interest rate announcement, Porter told CMP, with BMO having slightly nudged up the amount of overall rate increases it’s expecting from the Bank in what represents a “mild negative” for the housing market.
That’s been countered to some extent by a few cities having reported some stabilization in activity in August, although it remains to be seen whether that trend is mirrored across the country, Porter said.
“The preliminary results [for Canada-wide August numbers] suggest that things may have stabilized a bit – obviously at much weaker levels than we were earlier this year, or late last year,” he said, “but at least they’re still not falling in terms of sales. But overall, we haven’t really changed our outlook on the housing market.”
