The central bank has hiked its policy rate for the first time since 2018 – with further increases on the way
A busy spring is still in the cards for Canada’s housing market despite the Bank of Canada’s decision to hike its policy rate, according to a prominent economist – with any significant change only likely to be noted in the second half of 2022.
Benjamin Tal (pictured), deputy chief economist at CIBC World Markets, told Canadian Mortgage Professional that he anticipated a return to a more normal market towards the end of the year, but that the Bank’s 0.25% rate increase on Wednesday likely wouldn’t slow down activity in the short-term.
“I think the [biggest] impact will be felt in the second half of the year. In fact, I still expect a relatively strong spring as people enter the market before rates start rising in a more significant way,” he said.
“Then I see a situation in which the market will relax, [and] people will move back to fixed as opposed to variable rates. Now, variable accounts for about 50% of origination – that will go back to normal.”
The Bank’s decision to raise its benchmark rate by a quarter point, to 0.5%, marked its first rate change for nearly two years, and the first hike since 2018.
Tal said that while some observers might view it as a “hawkish” statement from the Bank, it was a relatively unsurprising announcement, particularly as the central bank had already indicated in its January release that rate increases were on the way.
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The evolving crisis in Ukraine, where Russian forces have launched a savage assault in the past week, was cited by the Bank as a “major new source of uncertainty” that’s seen spikes in prices for oil and other commodities, with the potential to negatively impact global economic growth.
Could that give the Bank pause for thought about its intentions for further rate increases down the line in 2022? It’s unlikely, said Tal, although not impossible in the case of a major and unforeseen event.
“It was interesting to hear what they have to say about the situation in Ukraine,” he said. “The question is whether or not it’s a recessionary event or inflationary.
“I think the Bank of Canada is going to look at it as more inflationary, and therefore unless something really bad happens, like a cyberattack or something, there’s no reason for them to deviate from the plan to raise interest rates.”
The Bank welcomed some positive economic news in Wednesday’s announcement, noting that Canada’s economic growth had surpassed its expectations in the fourth quarter of 2022 and reinforcing its view that slack has been absorbed in the country’s economy.
While it said the recovery from Omicron-induced setbacks was well underway, it also emphasized that consumer price index (CPI) inflation remained well above its target, with inflation expected to be higher in the near term than initially expected.
Tal said inflation had clearly been “overshooting” and that it was a given that it would remain elevated in the coming months (something both the Bank and markets are anticipating).
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“The big question is whether or not we’ll start seeing a major easing in inflationary pressures led by supply chain in the second half of the year,” he said. “I’d suggest that if we don’t see significant softening in inflation – let’s say by July, August, September – the risk [is] the Bank of Canada raising [rates] even quicker than expected.”
Hiking rates too quickly could plant the seeds for prolonged inflation in the next couple of years, he added, with a pragmatic approach likely to see the Bank moving its benchmark rate four times this year by a total of 0.25% per increase.
Both the Bank of Canada and the US Federal Reserve will be aware of the possibility of steep rate hikes at the wrong time triggering models for recession, Tal said – with past examples including the Fed’s decision to raise borrowing rates from 1.25% to 5.25% over a 17-hike streak in the mid-2000s.
“Central bankers are human. They can make mistakes,” he said. “My understanding from the current leadership in both the Fed and the Bank of Canada is that they will try very hard not to repeat past mistakes.
“But this is the risk that everybody has to face, especially in the housing market.”