The central bank indicated in March that it might be done on rate increases
In March of this year, it looked like the Bank of Canada’s long series of interest rate hikes might finally have come to an end.
The central bank had embarked on an aggressive path of rate increases over the previous 12 months, raising its trendsetting interest rate by 450 basis points in response to surging inflation and a red-hot economy.
By the beginning of 2023, the annual inflation rate was still well above the Bank’s target level of 2% – but it had seen signs in economic data to suggest that things were trending well enough in the right direction to justify a pause on rate hikes.
While it announced a 25-basis-point increase in its first rate decision of the year in January, the Bank also hinted that a pause on rates could be forthcoming, and its March announcement marked the first time in nine meetings that it did not hike its policy rate.
That was followed by another month of inaction in April, with the central bank’s willingness to keep rates untouched a possible sign that it could be done on hikes for the remainder of the year, according to some observers.
However, an unexpected uptick in the annual inflation rate and a resilient labour market means those pauses are now a distant memory, with the Bank having subsequently increased the policy rate by a total of 50 basis points since then.
Those jumps have seen the Bank’s benchmark rate hit the 5.0% mark, bringing it to its highest level for over 22 years – and another increase could be on the way in September.
ICYMI: We’ve made a lot of progress in the fight against inflation, but we’re seeing persistent price pressures. Monetary policy still has work to do. Our job is not done until inflation returns to the 2% target.https://t.co/zyuRcYx7lF#economy #cdnecon pic.twitter.com/dR1IjJmgc4
— Bank of Canada (@bankofcanada) July 13, 2023
Bank of Canada pause on hikes likely stirred the housing market, economists suggest
BMO chief economist Doug Porter suggested to Canadian Mortgage Professional in the wake of the Bank’s latest rate decision that it may have erred in striking too relaxed a tone on rate pauses at the beginning of the year, with its somewhat hawkish statement last week an indication that “they’re not going to make that mistake again.”
The central bank’s apparent signal that rate hikes had come to an end helped put a fire under the housing market, according to Porter – a view shared by CIBC World Markets’ deputy chief economist Benjamin Tal (pictured top).
He told Canadian Mortgage Professional that the resurgence of sorts witnessed in Canada’s housing market in the first half of 2023 was at least partly due to the Bank’s optimistic language on rates.
“What we have seen over the past six months is very interesting,” Tal said. “The minute the Bank of Canada announced that they were pausing rates in January and February, we’ve seen a significant improvement in the resale market, which means that people care not only about the level of interest rates, but also about the direction.
“The fact that the Bank of Canada was pausing provided some sort of insurance to the market, injected some security or confidence in the market, and we’ve seen sales rising and even supply improving. Now that they’re starting to revise in June, July, and [possibly] in September… you have this confusion that will slow down the market, no question about it.”
What impact will a return to rate hikes have on Canada’s housing market?
Even before last week’s hike, RBC reported a “mixed” initial reaction to the central bank’s decision to resume its series of rate increases.
Toronto, Vancouver, Ottawa, and Hamilton all saw buyers return to the sidelines as a result of the Bank’s 25-basis-point jump in June, RBC economists Robert Hogue and Rachel Battaglia said, although Calgary, Edmonton, Montreal, and the Fraser Valley witnessed little to no letup in activity.
“We’ve been surprised by the speed with which some markets, [for example] Toronto and Vancouver, rebounded this spring,” the economists said.
“Our view had been – and in fact remains – that the initial stage of the recovery would be gradual in the face of massive ongoing affordability challenges. Buyers retreating in key markets in June could be sign that the future trajectory will be more measured.”
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