The chief economist said the Bank of Canada's decision to keep rates steady was understandable in that light
With some “very ugly” economic data in the cards for January thanks to the impact of the Omicron COVID-19 wave, the Bank of Canada’s reasons for not hiking its benchmark rate last week were relatively straightforward, according to a prominent economist.
Doug Porter (pictured), chief economist and managing director at BMO Financial Group, told Canadian Mortgage Professional that the Bank had likely held off on announcing a rate increase due to those ongoing pandemic difficulties, as well as Governor Tiff Macklem’s long-stated intention to give ample warning before hiking rates.
“On the one side, the economy is still dealing with some pretty severe restrictions from Omicron, and really, those only began at the start of the year,” he said. “I think they just want to make sure the restrictions are starting to lighten up and things are getting back to somewhat normal before they start raising interest rates.
“The other reason I believe they held off for now [is that] the Governor was quite straightforward early on – he told Canadians that he would let them know before he started raising interest rates.”
That was a commendable decision, Porter said, with Macklem having stuck by his word in giving adequate notice that rate rises were impending: the Bank’s announcement indicated that rates “will need to increase” and signalled the end of its historic forward guidance, essentially a pledge to keep rates steady.
Instead of moving in January, the Bank’s benchmark rate is now expected to remain at its current low – 0.25% - until at least the next rate announcement, scheduled for March 02. Could that delay see a short-term surge on the housing market as Canadians rush to take advantage of those rock-bottom rates?
The fact that the country’s key real estate market season is about to kick into gear represented one of the strongest cases for moving rates in January, Porter said, to get out ahead of a possible heating-up of activity.
Read next: Rate increases – what could they mean for the housing market?
Still, he said that while the market could accelerate in the coming weeks because of that delay on rate hikes, any long-term impact was likely to be negligible.
“It’s hard to believe that there’s anybody out there still sitting on the fence in the real estate market given how incredibly strong sales have been in the last 18 months,” he said. “But there might still be a few who might be prompted into rushing into the market in the weeks ahead to try and [beat] a rate hike.
“I have a tough time believing that’s going to be a long-lasting effect by any means. But any further heating up in the housing market at this stage is a concern, even if it is only for a few weeks.”
With annual inflation having recently hit a 30-year high (4.8% in December, according to Statistics Canada), the Bank had faced significant pressure to take action by hiking its policy rate in response.
On the much-discussed pandemic-vs-inflation issue (the question of whether to keep rates low because of COVID-19 or hike them to stave off that inflation risk), Porter said another resurgence of the virus would probably give central bankers ample food for thought – but any change of course from rate increases was unlikely.
“I think it would make them gulp hard,” he said. “It would be a challenge to be really aggressive, but I get the sense that central bankers believe the pandemic has now become as much an inflation risk as an inflation dampener, and I believe they would press on.
Read next: What does the Bank of Canada statement mean for variable rates?
“They might not be quite as aggressive if we have repeated waves in the months and quarters ahead, but I don’t think it would stay their hand.”
Porter pointed to a recent statement by chair of the US Federal Reserve Jay Powell, who said that Omicron was having significant upward risk to inflation, as an indication that central bankers were steadfast in their view that rates would have to rise.
“To me, that was a very clear signal that the game had really changed, and this was not going to change their view that they really had to get on with things.”
As for the possibility of central banks factoring in rate rises totalling more than a quarter-point per increase in the spring? Porter said that was an unlikely prospect – although it would indicate their very real worries over inflation if it did come to pass.
“If inflation doesn’t show signs of starting to moderate a little bit by the middle of spring here, I think that’s when we might start to be able to talk about the possibility of the Federal Reserve and the Bank of Canada having to go in bigger [hikes] than 25 basis points at a time,” he said.
“It would show that they’re deeply concerned about the inflation backdrop, and that they’ve fallen behind the curve – which I actually do think they’re already a little bit concerned about.”
