Has the BoC reached an endpoint on rate hikes? CIBC's Tal gives his verdict

  1/16/2023 |   SHARE
Posted in Canadian Economy and Interest Rates by Boris Guerdjikov| Back to Main Blog Page

CIBC Office

The Bank of Canada has probably reached the end of its rate-hiking cycle for now – but it still needs to keep Canadians on their toes about the possibility that that could change, according to CIBC’s Benjamin Tal.

The banking giant’s deputy chief economist told Canadian Mortgage Professional that the central bank had to toe a delicate line in its messaging to Canadians as it planned to hit pause on hikes to its benchmark rate after Wednesday’s 25-basis-point increase.

“The Bank of Canada, of course, will keep its options open, because I think what [it] would like to see is that you and I are feeling secure about them not moving again, and that will ease long-term interest rates,” he said.

“So they are in a very difficult situation in which they have to tell you they are done without telling you they are done – to keep you guessing, and that’s basically what’s happening.”

BoC strikes optimistic tone on Canadian economy

Wednesday’s announcement brought the Bank’s trendsetting interest rate to 4.5%, a full 425 basis points higher than it sat at the same time last year when the Canadian economy continued to reel from the impact of public health restrictions and business closures.

Still, the central bank sounded a bullish note on the economy, indicating in its statement accompanying the rate decision that while it expected economic growth to stall in mid-2023, it should gather pace later in the year to grow 1% overall in 2023 and around 2% in 2024.

It also revealed a projection for global economic growth that was higher than its October prediction, forecasting 2% expansion this year and 2.5% in 2024.

Tal said those views may be wide of the mark – perhaps a deliberate move on the part of the Bank of Canada.

“I think that their projections for economic growth is a bit optimistic for 2023 and 2024. I think they’re a bit high, relative to where we are now,” he said. “And that’s again on purpose, to keep the market guessing about the potential increase in interest rates beyond the last move.”

The Bank said it expected inflation to come down “significantly” in 2023 with lower energy prices, an easing of global supply chain snarls, and cooler economic demand thanks to higher interest rates likely to continue puncturing that bubble.

While still high at 6.3%, the Bank indicated inflation should hit the 3% mark by the middle of this year and return to its target of 2% at some point in 2024.

What does the Bank of Canada announcement mean for the housing market?

Rising interest rates over the past year have helped pour cold water on Canada’s once-sizzling housing market and cool both home sales and house prices as the Bank bids to slow the economy and curb rampant inflation.

While the news of a likely pause in rate hikes will probably come as a relief to many homeowners and borrowers, Tal cautioned against assuming that an uptick in housing market activity is in the cards.

“The interest-rate fog is starting to kind of ease, but it doesn’t mean that the pain is not there,” he said. “The fact that interest rates will not be rising from this point does not mean that the pain will not be there because it’s working with a lag.”

Indeed, Canada’s chronic lack of housing supply, a crisis which to date has shown little sign of abating, means that conditions are likely to remain tight for much of the first half of the year, he suggested.

“I think that the housing market will continue to be under pressure over the next few months. We have to remember that this is the first correction ever that supply, namely listings, did not fall,” he said.

“I suggest that will change in 2023 with the market more balanced. We will see more sellers willing to list, we will see some distressed sellers into the market, and that will put downward pressure on prices that were protected by the lack of listings.”

Source: Canadian Mortgage Professional

Bank of Canada, Bank of Canada Benchmark Rate, Canadian Economy, Economic Growth, Economic Recession, Mortgage Rates Canada, Mortgage Rates Forecast

Ask Boris Guerdjikov

Thinking of buying or selling a property, or have a question regarding the real estate market? Fill out the form below and I'll get back to you promptly.

Security Question: 12 + 8 =