"We think they've got some signalling to do that they take the inflation situation more seriously than their actions suggest"
A 50-basis-point increase in the Bank of Canada’s benchmark rate could be in the cards for April with the central bank currently “behind the curve” on inflation, according to Scotiabank’s chief economist.
Jean-François Perrault (pictured top), who also serves as the banking giant’s senior vice president, told Canadian Mortgage Professional that a 0.5% hike in the Bank’s next rate announcement was “pretty likely” after recently released Statistics Canada data showed inflation ballooned to 5.7% last month.
Such a move would see the central bank’s trendsetting interest rate rise to 1%, having spent nearly two years at a rock-bottom 0.25% following the onset of the COVID-19 pandemic.
“We think they’ve got some catching up to do. We also think they’ve got some signalling to do that they take the inflation situation more seriously than their actions today suggest,” he said.
“For those reasons we think they should raise interest rates by 50 [basis] points in April… Given where expectations are, it’s very difficult to see them not signalling a more aggressive response to inflation.”
While Canada’s housing market has surged partly because of those low pandemic-era interest rates, Perrault said that such a hike would be unlikely to have a significant material impact in cooling down activity, particularly given the current robustness of that market.
February economic data pointed to strong market conditions, with listings improving in a “very, very welcome” development for the housing market, according to Perrault.
“We’ll be entering the spring market more fully in the next few weeks. The dynamism in the market is really quite remarkable, and that… is in part because there’s a lot of people that are still trying to buy a place,” he said.
“Even if interest rates move up and they take some buyers out of the market, there are still plenty of others that are there to take advantage of the strength in the market.”
The Canadian labour market added 337,000 jobs in February, recovering strongly from the Omicron-induced shock of February job losses, and the unemployment rate has also sunk to levels not seen since just before the pandemic struck.
At 5.5%, Canada’s employment rate is now lower than it was in February 2020 (5.5%), one month prior to the onset of the pandemic, with last month’s surge in employment numbers spurred by gains in sectors that had been hit by January public health restrictions.
Perrault said that those were “unbelievably strong” job figures even if they were partially skewed by the rebound from January, pointing to a powerful labour market and growth environment that would likely continue.
That was important to note in the context of future Bank of Canada rate increases, he said, with economic expansion likely to offset some of the impact to the housing market of those hikes.
As for the prospect of the housing market levelling off towards the end of the year? Perrault said continued lack of inventory meant it remained “generally undersupplied in a very fundamental sense” both in terms of units available and population.
“That does suggest that, unbelievable as it maybe is to say, it’s not inconceivable that prices continue to rise from here and now,” he said. “We think interest rate increases are going to moderate that very significantly, but the momentum is very much there.”
Perrault pointed out that house prices across the country have effectively spiked by 50% in the past two years – but that hasn’t had a corresponding cooling effect on demand. The same could go for interest rate hikes, he said.
“The deterioration of affordability that flows from price increases almost certainly swamps a two- or three-percentage-point increase in mortgage rates,” he said. “A 50% increase in [house prices] hasn’t had a very detrimental impact on the housing market in terms of demand.
“Sure, higher rates are supposed to slow the real estate market, but the housing market hasn’t slowed despite this very, very significant increase in prices over the last couple of years. That speaks to this demand for housing that’s out there.”
For Canadians who already hold mortgages, there will be inevitable negative consequences from rate hikes down the road, although Perrault said only a small few are likely to be seriously affected.
“The purpose of higher policy rates is to cool things down, to make it a little bit more expensive for households to buy things. So there are going to be impacts,” he said.
“That’s why they raise interest rates. Generally speaking, I think those impacts are going to be manageable for the large majority.”