TD: Full impact of rate hikes will be delayed for a few months

The most significant impacts of the central bank’s rate hikes won’t be apparent until early next year, according to Toronto-Dominion Bank chief economist Beata Caranci.

The Bank of Canada’s overnight rate stands at 2.5%, with TD predicting the rate to go up as high as 3.25% by the end of 2022.

However, while well-intentioned, the BoC’s current moves towards moderating inflation might well prove to be a cure that’s worse than the disease.

“The challenge is that inflation is a lagging and backward-looking indicator, and interest rates work with quite a big lag, meaning the peak impact and transmissions won’t be known until next year,” Caranci said. “So, if you keep increasing interest rates on the data that happened already in the past, there’s a very high risk that you overcorrect, so you’d make a policy mistake.”

Read more: Analysis: Rate hikes are the main driver of the affordability crunch

Such an error would have major implications on future moves, Caranci warned.

“Once you’ve entered the territory of a policy mistake and you have to reverse course, it may be too late because the confidence levels may have already been undermined. And if you have already moved toward a recessionary cycle, it’s very difficult to undo that momentum.”

Still, Caranci remains optimistic about the Canadian economic system’s long-term stability.

“I don’t think there’s a high prospect for a deep recession,” Caranci said. “I’m 50-50 on the soft landing and the shallow recession. Why I don’t gravitate along to the deep recession is we don’t have the historical excesses that normally get you to a deep recession.

“Given our forecast of a soft landing, we believe we’ve probably absorbed the bulk of the housing correction. We’ve had a significant recalibration in sales already and in average prices as people move away from high priced homes. You can see there’s more resilience happening in the condo sector versus the detached market from an affordability perspective.”