A number of factors will play into the central bank’s thinking as next year comes into view
After keeping interest rates at rock-bottom lows for nearly two years since the onset of the COVID-19 pandemic, the Bank of Canada embarked on a dramatic spree of hikes in 2022 – and much attention is already turning to what path it will take in the year ahead.
The central bank seemed to indicate in its last policy rate statement of the year that it could be ready to end that series of increases, a departure from the consistent line it had taken in prior announcements that rates definitely needed to continue rising.
Still, inflation continues to balloon well above the Bank’s target rate despite having ticked slightly downwards in November, sitting at 6.8% at the end of the year with one further report on annual price growth expected before the next policy rate decision arrives on January 25.
The Bank is likely to hold off on a further rate hike in January if “significant further traction” is clear in the core rates of inflation ramping downwards, according to RBC assistant chief economist Robert Hogue (pictured top).
“It will probably still leave the door open to go further if inflation doesn’t behave the way we expect it all the way back to the target range,” he told Canadian Mortgage Professional.
“But I think it’s [looking for] a further improvement on the inflation front and also some signs that the economy is softening – because ultimately, the Bank of Canada’s tools – mainly interest rates – are designed to cool the economy down, to realign aggregate demand with aggregate supply.”
The Bank of Canada’s target rate for annual price growth is 2%. If it sees that GDP levels off or declines, and the labour market softens, it’s likely to take that as a sign that its policy tightening is working, Hogue added, and that it has space to hold off on further rate hikes.
The Bank of Canada’s “very encouraging” language in its latest policy rate announcement indicates that it could be ready to hit pause on its series of rate hikes, according to CIBC deputy chief economist Benjamin Tal.https://t.co/S1CFzXyIcp
— Canadian Mortgage Professional Magazine (@CMPmagazine) December 8, 2022
Is a more stable housing market on the way in 2023?
The Bank’s series of rate hikes throughout the year have contributed to an uncertain housing and mortgage market environment for homebuyers and homeowners alike, reducing affordability for many buyers while also seeing borrowing costs spike for many owners.
After staying steady at 0.25% until March, the central bank’s trendsetting interest rate spiked by a full four percentage points between then and December.
An end to its rate-hiking trajectory, then, could bring a degree of stability to the housing market – although Hogue emphasized that it could be a few months before it’s clear that the Bank is definitely done on hiking rates.
“The market is still adjusting to sharply higher rates. And I think that will take further time to fully adjust to, but eventually it will, and our view [is that] will be around springtime, somewhere around there,” he said. “It will probably vary across the country.
“But I think most of the increase is done, and most of the decline in home resale activity is probably behind us as well. So there’s probably a little bit of further room to go down in the coming months, but probably not that much. And then eventually the market will kind of stabilize.”
How big of a concern are mortgages hitting their trigger rate?
A byproduct of the rising-rate environment of 2022 has been that many variable-rate mortgages are approaching, or have passed, their trigger rate – the point at which monthly payments no longer reduce remaining principal and only cover interest.
That may cause some concern in the market, Hogue said, although he also emphasized the efforts being made to provide solutions for borrowers being impacted by such a scenario.
“I think banks have reported some of those numbers in recent financial result disclosures and they don’t seem to be super high, [although] it is definitely not negligible,” he said. “I think it is a factor out there, and there are a lot of borrowers that will have a fairly tight situation going forward, but financial institutions are working with their clients in order to avoid some significant trouble either now or down the road.
“But for many borrowers, especially recent borrowers, I think those will be fairly significant challenges.”
What are your thoughts on whether the Bank of Canada is likely to make another move on its policy rate in January? Let us know in the comments section below.
