The central bank still hasn’t fully shut the door on further increases, says economist
Canadians have become accustomed to interest rate hikes from the Bank of Canada in recent months, with Wednesday’s announcement marking its eighth consecutive benchmark rate increase – but it also contained a welcome indication from the central bank that it’s ready to pause that cycle.
In a statement accompanying its 25-basis-point hike, the Bank said that while it was prepared to increase its rate further if required, it “expects to hold the policy rate at its current level” if economic trends pan out as expected.
While the Bank didn’t quite shut the door on further rate hikes down the line, its comments were a sign of its confidence that the current policy rate is sufficient to continue bringing inflation down, according to Benjamin Reitzes (pictured top), BMO Capital Markets’ managing director, Canadian rates and macro strategist.
“I think what they’ve done is they said that they need a meaningful amount of evidence that inflation is accelerating [to hike further],” he told Canadian Mortgage Professional. “Ahead of the next meeting on March 8, they only get one CPI [consumer price index] print and one jobs number.
“One report is not sufficient for anything, but if you fast-forward to April, they’ll have three inflation and three jobs reports. And if, in those three reports, you were to get three straight months of accelerating inflation and really strong jobs growth, that would probably force their hand – they’ll need to see that to move further.”
With rates having risen substantially since last year (Wednesday’s hike means the Bank’s benchmark rate is now 425 basis points higher than its level at the same time in 2022), Reitzes said the central bank would be well aware of the lag effect in interest rates, and the risk of going overboard.
That said, BMO has no more rate hikes in its forecast for the remainder of the year, “and assuming inflation doesn’t take off again and reaccelerate, it does look like the Bank of Canada’s done raising rates for now,” Reitze said.
Governor Tiff Macklem: “We have raised rates rapidly, and now it’s time to pause and assess whether monetary policy is sufficiently restrictive to bring inflation back to the 2% target.”https://t.co/eCT7QUqd1Q#cdnecon pic.twitter.com/XD1rDHUtc1
— Bank of Canada (@bankofcanada) January 25, 2023
How long will it take for inflation to reach the Bank of Canada’s target level?
Inflation, which ballooned to a 40-year high last summer, is currently sitting at 6.3%. That’s just under two percentage points lower than its June peak, but still markedly higher than the Bank of Canada’s target level of 2%.
Still, the Bank’s latest statement indicated that it anticipates CPI inflation will fall to 3% by the middle of this year, with a return to 2% expected to take place at some point in 2024.
That projection is somewhat on the optimistic side – but certainly a reasonable forecast, according to Reitze. He said that the Bank would likely remain focused on the core numbers than headline inflation figures, with energy prices having dropped to claw back some of the big gains made last year.
“You’re going to get the reversal of those big increases assuming we don’t get another surge and broader prices here, so that’s going to bring the year-over-year rate down a lot,” he said.
“You’ll get something similar for the core numbers, but it’s not quite as extreme. So I think they’ll be watching the core numbers a little bit more closely than headline.”
What’s the outlook for the housing market?
While the news that the Bank of Canada is likely to hit the pause button on rate hikes may inject a degree of stability into the country’s housing market, challenges are likely to linger – not least because the hike means that many borrowers are once again saddled with higher mortgage payments.
BMO isn’t expecting rate cuts until 2024, Reitzes said, meaning that variable-rate mortgage holders will continue to bear the brunt of those higher payments and affordability should remain a steep obstacle.
Read this article to know the mortgage rate forecast for 2024-2025 here.
“I think maybe the worst news behind this from that perspective is you’re likely not going to see five-year mortgage rates move back to the peaks that we saw, but there’s still some correction needed in prices to adapt to where rates are to improve affordability to a kind of more appropriate, more sustainable level,” he said.
“It wouldn’t shock us to see sales pick up a little bit in the springtime. Some of that is seasonality, some of that is that sales are just so low right now. Maybe more supply brings activity up a little bit as well. So [there’s some] downside on prices and maybe a little bit of upside on activity, but still a challenging period – at least through the middle of the year.”
What’s your reaction to the latest Bank of Canada hike and its implications for the housing and mortgage markets? Let us know in the comments section below.
