The Bank's first rate jump since 2018 is unlikely to be its last
The Bank of Canada introduced its first policy rate increases since 2018 in its latest announcement – and it’s not likely to wait long before it hikes that rate again.
That’s the view of BMO Financial Group chief economist and managing director Doug Porter (pictured top), who told Canadian Mortgage Professional that further quarter-point raises in each of the Bank’s next two rate announcements were a very real possibility.
“Historically, the Bank of Canada has not tended to fool around once they start raising interest rates. They tend to go on a series of moves when they decide it’s time to start moving on rates, and I didn’t get the sense that they were going to change from that pattern this time either,” he said.
“I would expect them to hike rates again in April and probably the next meeting after that.”
That said, Porter indicated that BMO did not view rate hikes of more than 0.25% each as “terribly likely,” even if it couldn’t be ruled out entirely. More clarity is required on the evolving situation in Ukraine, he said, before individual 50-point increases – which US Federal Reserve chair Jerome Powell has not discounted later in the year – could be deemed viable.
Other than its rhetoric on Russia’s invasion of Ukraine, which it called a “major new source of uncertainty”, the Bank’s latest rate announcement was a largely predictable affair, having already heavily telegraphed a March rate hike in its January statement.
A housing slowdown?
The standalone impact of that quarter-point increase on Canada’s housing market will probably be mild, Porter said, with a cooling effect only likely to come into play after the rate has been raised several times.
“I always say every basis point matters to somebody out there, so I don’t brush off even just a quarter-point hike,” he said, “but the market just has so much momentum that I think it’s going to take quite a bit more to seriously dampen [it].
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“Our general working assumption is that it takes about 100 basis points of rate hikes to make a serious impact on the housing market. Having said that, we’ve just had such scorching numbers over the past year [that] it’s tough to believe that anything close to that pace can be maintained.”
While gradual rate increases should eventually moderate the housing market and level off sales to some degree, the same can’t be said for house prices, according to Porter.
Even in the event that rates increase this year, prices look set to continue their steep upward trajectory, he said. “In January, depending on which measure you look at, prices are up by 25-30%. It’s pretty difficult to believe that they’re going to suddenly hit the brakes, let alone go into reverse.”
Inflation concerns continue
The Bank’s announcement featured some interesting language on inflation, signalling that it was expected to be higher in the short term than originally anticipated – and mentioning the prospect of a more pervasive long-term problem.
Porter said that while the Bank had struck a fairly confident tone in previous statements that current inflation levels were a transitory phenomenon, its most recent announcement showed that may no longer be the case.
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“You can sense their concern on the inflation front is getting ramped up with pretty much every rate decision,” he said. “They have been slowly but surely warning, or sounding more concerned, that inflation is proving to be stickier than they believed.”
While the Bank may initially have viewed increases in the price of oil and other commodities as relatively temporary, there’s now a risk that it’s feeding into the price of other goods that may not have been affected by supply chain issues or energy prices, according to Porter.
A cautious note
The Bank opted against adjusting its quantitative easing program (a monetary policy to decrease the economy’s liquidity) in the recent rate announcement, a move that surprised some observers who believed it would take steps to start reducing its balance sheet rather than holding it steady.
That could be a sign of its concern over the Russia-Ukraine war, Porter said, with an unpredictable outlook ahead in that current conflict and for its international repercussions.
“Their decision was maybe a little less aggressive than it could have been,” he said. “Again, I can’t help but wonder if the uncertainty around Ukraine made them pull back a bit.”