'I think that deep inside, they know the likelihood of them raising again is relatively slim – but in their language they will not admit that'
The Bank of Canada’s language in its latest statement was designed to avoid the impression that it’s done on rate increases – but another hike this year looks unlikely, according to Canadian Imperial Bank of Commerce (CIBC) deputy chief economist Benjamin Tal (pictured).
The central bank kept its benchmark rate unchanged at 5.0% in Wednesday’s announcement but emphasized its willingness to hike again if required, an approach that Tal said was aimed at underlining the fact that much work still needs to be done on bringing down inflation.
“They’re keeping us guessing,” Tal told Canadian Mortgage Professional. “They’re not going to commit to not raising interest rates anymore. [That’s] no big surprise – they don’t want to be seen as relaxed about inflation.
“So it’s really a type of approach saying, ‘Things are moving in the right direction, but not good enough – therefore, we keep the option to raise again open.’”
Still, with the Bank possibly already in overshooting territory, any further rate increase would only increase the size of that risk, Tal said, with “very clear” signs indicating that the economy, labour market and bargaining power of labour are all slowing.
“All of those forces suggest that there is no reason to continue to raise interest rates, and I think that the Bank of Canada knows that,” he said.
“I think that they have to be careful with the language… so they must keep everybody guessing. Quite frankly, I think that deep inside they know that the likelihood of them raising again is relatively slim – but in their language, they will not admit that.”
Wednesday’s decision followed two consecutive rate increases in June and July by the central bank, moves which marked the ninth and 10th times since March 2022 that the Bank’s policy rate had risen.
We have maintained our policy interest rate at 5.00%.
— Bank of Canada (@bankofcanada) September 6, 2023
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What will decide whether the Bank starts to hike rates again?
Factors to watch closely between now and the central bank’s next decision on interest rates, scheduled for October 25, include the direction of the unemployment rate and service inflation, Tal noted.
If the unemployment rate stops rising – and service inflation remains stickier than expected – that could impel another 25-basis-point hike, he said, even if economic data as currently trending suggests no further move is likely.
The overall inflation rate, meanwhile, could prove “very difficult” to restore to the 2% target, according to Tal. The consumer price index (CPI) slowed dramatically after spiking to a 39-year high of 8.1% last June, falling to 2.8% a year later but jumping to 3.3% in July of this year.
The Bank said it believes overall inflation will remain elevated in the near term before gradually easing, with “little recent downward momentum” evident in underlying inflation.
“The longer high inflation persists, the greater the risk that elevated inflation becomes entrenched, making it more difficult to restore price stability,” the Bank said.
It remains “concerned” about persistent underlying inflationary pressures, and added it would be monitoring whether excess demand, inflation expectations, wage growth and corporate pricing behaviour would be consistent with achieving its 2% target.
Could Canada’s housing market heat up again?
When the central bank last paused interest rate increases in the spring, the national housing market started to gather pace as price and activity rebounded – a trend that partly appeared to convince the Bank further hikes were required to pour more cold water over the economy.
The remaining months of 2023 are unlikely to see a repeat of that trend, according to Tal, with current sky-high borrowing costs and continuing uncertainty over whether more rate hikes are coming set to temper any upswing in demand.
“I think that the rate at which [the housing market] is slowing down might soften a little bit, but I don’t see an increase in activity anytime soon,” he said. “Rates are extremely high. The qualifying rates are very, very high. The latest increase in rates was the last straw, and therefore I think that we are going to stabilize with a bias towards some weakness – but it’s not a freefall.”
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