The overnight rate could settle around 3%, according to leading economist
The Bank of Canada will probably start cutting interest rates by the middle of 2024 – and its overnight rate is likely to settle around 3%, according to CIBC deputy chief economist Benjamin Tal (pictured top).
Speaking at the Mortgage Professionals Canada (MPC) national conference in Toronto this week, Tal said the central bank is reaching an endpoint on rate hikes, with its trendsetting rate likely to stay around its current level for the first half of next year before ticking downwards again.
With the Bank’s penultimate rate announcement of the year scheduled to take place next week (October 25), Tal said a more relevant issue than another possible rate hike was the question of when rates will begin to fall.
“If they move, they move. If they don’t, they don’t,” he said. “The next question is: Is that the last one? A reasonable answer to that question is this: We are very, very close to the end of monetary tightening.”
Buffers that protected consumers from recent rate increases – namely, the pent-up savings amassed by Canadians during the pandemic – have been slowly whittled away, Tal said, meaning that the impact of rate hikes, and the power of the central bank, have grown.
As a result, he added, there’s little cause for rates to rise further. “Let’s assume that this is the end, the coming two weeks. The next question that I’m sure everybody’s asking is: When are they cutting?
“I say they will not cut interest rates before mid-2024: June, July, whatever the month is. By how much? That’s another conversation to have with clients. We started this at 1.75%. We went to zero, and then we went to [the current high], then we cut in mid-2024. To what? I say 3%.”
Despite scaled-back rate cut expectations, North American central banks are anticipated to transition to lower interest rates by 2024, says Royal Bank of Canada.
— Canadian Mortgage Professional Magazine (@CMPmagazine) October 12, 2023
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“It’s not going to be pretty” if BoC leaves rates untouched
Canada’s mortgage market can perform “extremely well” with a 3% overnight rate, Tal said – and the central bank can ill afford to leave rates at their current level for long, particularly with a huge percentage of mortgages originated during the pandemic era scheduled for renewal in the not-too-distant future.
“No less than 57% of all mortgages in Canada will be reset in 2025-26,” Tal said. “This is the COVID cohort of 2020 and 2021 that are coming for renewal. I say if the Bank of Canada does not cut interest rates, it’s not going to be pretty, to put it mildly.”
The veteran economist has previously sounded the alarm on the prospect of high rates persisting for longer than needed, with a bumpy spell for Canada’s mortgage market already on the way as those 2025 renewals loom.
On Monday, he reiterated that the central bank can play a key role in mitigating the impact of that renewals flurry by bringing rates down next year.
“When you cut interest rates, the five-year rate goes down… the shock will [still] be there,” he said. “The 2025-26 cohort will feel the pain, but it will be much, much milder if you compare it to normal change in interest rates.
“So we are lucky that we have enough time between now and 2025 for the Bank of Canada to start cutting interest rates in mid-2024, so that by the time we reach 2025 and 2026, we are done. Not at 0%, not at 1.75%, but 3% will do.”
2024 rate cuts would help avoid significant economic shock
While some homeowners will still face the shock of higher renewal rates in such a scenario, Tal said a 3% rate would keep mortgage defaults at a much more manageable level than if rates remained high.
“The shock will be there. Some clients will be forced to sell. But it’s not going to be recessionary,” he said. “It’s not going to demolish the housing market. The opposite is the case. So I think that’s where the focus should be – not whether the Bank of Canada will raise again next week, but when they’re starting to cut, and by how much.”
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