No Surprises Here: The Bank of Canada Hiked Rates By Only 25 bps, Signalling a Pause

General Bob Rees 25 Jan

No Surprises Here: The Bank of Canada Hiked Rates By Only 25 bps, Signalling a Pause
As expected, the Bank of Canada–satisfied with the sharp decline in recent inflation pressure–raised the policy rate by only 25 bps to 4.5%. Forecasting that inflation will return to roughly 3.0% later this year and to the target of 2% in 2024 is subject to considerable uncertainty.

The Bank acknowledges that recent economic growth in Canada has been stronger than expected, and the economy remains in excess demand. Labour markets are still tight, and the unemployment rate is at historic lows. “However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has declined substantially. As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment is expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand.”

The report says, “Canada’s economy grew by 3.6% in 2022, slightly stronger than was projected in October. Growth is expected to stall through the middle of 2023, picking up later in the year. The Bank expects GDP growth of about 1% in 2023 and about 2% in 2024, little changed from the October outlook. This is consistent with the Bank’s expectation of a soft landing in the economy. Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, moderating prices for durable goods.”

Short-term inflation expectations remain elevated. Year-over-year measures of core inflation are still around 5%, but 3-month measures of core inflation have come down, suggesting that core inflation has peaked.
The BoC says, “Inflation is projected to come down significantly this year. Lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand are expected to bring CPI inflation down to around 3% in the middle of this year and back to the 2% target in 2024.” (the emphasis is mine.)

The Bank will continue its policy of quantitative tightening, another restrictive measure. The Governing Council expects to hold the policy rate at 4.5% while it assesses the cumulative impact of the eight rate hikes in the past year. They then say, “Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target, and remains resolute in its commitment to restoring price stability for Canadians.”

Bottom Line

The Bank of Canada was the first major central bank to tighten this cycle, and now it is the first to announce a pause and assert they expect inflation to fall to 3% by mid-year and 2% in 2024.

No rate hike is likely on March 8 or April 12. This may lead many to believe that rates have peaked so buyers might tiptoe back into the housing market. This is not what the Bank of Canada would like to see. Hence OSFI might tighten the regulatory screws a bit when the April 14 comment period is over.
 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

Residential Mortgage Commentary – Inflation & interest rates: lead characters for 2023

General Bob Rees 9 Jan

Thank you to our preferred lender, First National, for this insight into 2023 interest rate projections

  • Jan 9, 2023
  • First National Financial LP

A lot of the recent talk in financial and real estate circles has been centering on the possibility of a pause in the Bank of Canada’s aggressive interest rate increases.  Some speculate that could happen at the next rate setting, later this month.

The Bank raised rates seven times last year in an effort to rein-in galloping inflation.  It does seem to be working, but there are some stubborn sticking points.

Headline inflation, known as the Consumer Price Index (CPI), has dropped.  It was 8.1% in July and drifted down to 6.8% in November.  However, the drop from October to November was a mere one-tenth of one percentage point and the Bank’s target rate remains significantly below that, at 2.0%.

As well, the BoC’s preferred inflation measure, Core Inflation (which strips out volatile components like food and fuel), actually increased.  A simple averaging of the three components that the Bank uses to measure Core Inflation came in at nearly 5.7% in November, up from 5.3% in October.

Other factors that figure into the Bank’s plans include Gross Domestic Product and unemployment.  Canada’s GDP continues to grow, albeit modestly, despite rising interest rates.  It increased by 0.1%, month-over-month in November.  Unemployment dipped 0.1% to 5.0% in December.  Both of these tend to fuel higher wages which are a key driver of inflation.

The Bank of Canada, itself, remains firmly dedicated to battling back inflation.  Governor Tiff Macklem has said he would rather over-tighten than under-tighten and run the risk of having high inflation linger and become entrenched.

The U.S. central bank has made it clear it plans more rate hikes.  Given the integration of the Canadian and American economies, the Bank of Canada does have to pay attention to what its American counterpart does.

The BoC will have new economic data by the time it makes its January 25th announcement.  The December numbers will provide a fresh look at how well the inflation fight is going.

Normally it takes 18 to 24 months for interest rate increases to work their way into the economy and we are only about 10 months into this tightening cycle.  It is reasonable to expect another 25 basis-point increase on the 25th.  Given the Bank’s apparent success so far it also seems reasonable to expect a pause sometime after that.

Looking ahead to a year from now some forecasters say we might start to hear talk of interest rate cuts, which would be welcome news.  Cuts would allow the BoC to move toward its, long stated, goal of normalizing rates back into the neutral range of 2.5% to 3.5%.  The Bank of Canada, and central banks around the world, have been trying to do that for more than a decade – since the ’08 – ’09 financial collapse.