Speaking with CMP, the deputy chief economist gave his view on the highly anticipated statement
Canadian Imperial Bank of Commerce (CIBC) deputy chief economist Benjamin Tal (pictured) has said that while the Bank of Canada is unlikely to reveal any significant changes in tomorrow’s interest rate announcement, its intention to raise rates in the second half of 2022 is the right step for the Canadian economy.
Speaking with Canadian Mortgage Professional, Tal said that with inflation currently representing the “number one risk facing the economy,” rate increases next year would help the Bank manage the trend and avoid the prospect of allowing it to escalate.
“Inflation is a lagging indicator, and when you chase a lagging indicator you tend to panic and raise interest rates way too quickly. Then you run the risk of overshooting,” he said.
“That’s what happened in many other recessions. If [the Bank of Canada] starts earlier, then they don’t need to panic and raise rates too quickly. The earlier you start, the less quickly you have to go, and that’s actually a very good development. I’m very encouraged by the fact that the Bank of Canada is talking about mid-2022 as opposed to 2023.”
Optimism about progress in vaccinations and economic activity, Tal said, was likely to be tempered in the Bank statement by caution about the Delta variant of the coronavirus, meaning that there’s unlikely to be any significant changes announced other than the continued softening of its quantitative easing policy.
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“It will be a very muted report,” he said. “Overall, I think there is a reason to believe that despite the variant, we are talking about a significant acceleration in economic activity as we’re opening up, and I think the market is already pricing in a situation in which the Bank will be moving [on rates] at some point in the second half of 2022.”
With many Canadians currently sitting on reserves of cash as a result of lockdowns and travel restrictions during the pandemic, there has been some speculation that this could fuel another surge in housing market activity for the remainder of the year.
Tal, though, said that those savings were likely to be spent on other areas of the economy, with the reserves probably not big enough to play a part in heating up the housing market.
“I think that most of this money will be spent on services where people have accumulated a significant amount of pent-up demand,” he said. “I don’t think that this will play a significant role in supporting the [housing] market.”
That market has witnessed a slowdown of sorts in recent weeks following a red-hot opening half of the year. While recent changes to the mortgage stress test – the qualifying rate for both insured and uninsured products – have been attributed by some as having had an impact on the market’s pace, Tal said that two factors had likely played a more important role: dramatic home price rises to the extent of unaffordability, and the rush to enter the market in recent months.
“A factor that is contributing to the slowdown in the market is the fact that we were borrowing activity from the future; there was this sense of urgency to get into the market, and we might say that the future has arrived,” he said. “That’s why we’re slowing down a little bit.
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“Add it to the potential impact of high interest rates down the road and you have a recipe for a more balanced market, a less panicky market, that will stabilize. The only risk to this scenario is a rapid increase in interest rates if you allow inflation to get too close.”
The future trajectory of those interest rates and their impact on the market, Tal added, would be the likely determinant of any potential further intervention by the federal government in the coming months – although more action could be required on the supply side.
“At this point, most of the policies that I would like to see are in the supply segment of the market, not demand,” he said. “I think that we are trying to fight supply issues with demand tools, and that’s not very useful.
“I think the regulators will wait to see what interest rates do to the market before they do anything else.”
