Bank of Canada Pauses Rate Hikes as US Fed Promises Further Tightening

Latest News Kim Stenberg 8 Mar

The Bank of Canada HOLDS RATES STEADY Even as the Fed Promises to Push Higher

 

As expected, the central bank held the overnight rate at 4.5%, ending, for now, the eight consecutive rate increases over the past year. The Bank is also continuing its policy of quantitative tightening. This is the first pause among major central banks.

Economic growth ground to a halt in the fourth quarter of 2022, lower than the Bank projected. “With consumption, government spending and net exports all increasing, the weaker-than-expected GDP was largely because of a sizeable slowdown in inventory investment.” The surge in interest rates has markedly slowed housing activity. “Restrictive monetary policy continues to weigh on household spending, and business investment has weakened alongside slowing domestic and foreign demand.”

In contrast, the labour market remains very tight. “Employment growth has been surprisingly strong, the unemployment rate remains near historic lows, and job vacancies are elevated.” Wages continue to grow at 4%-to-5%, while productivity has declined.

“Inflation eased to 5.9% in January, reflecting lower price increases for energy, durable goods and some services. Price increases for food and shelter remain high, causing continued hardship for Canadians.” With weak economic growth for the next few quarters, the Bank of Canada expects pressure in product and labour markets to ease. The central bank believes this should moderate wage growth and increase competitive pressures, making it more difficult for businesses to pass on higher costs to consumers.

In sum, the statement suggests the Bank of Canada sees the economy evolving as expected in its January forecasts. “Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year,” policymakers said.

However, year-over-year measures of core inflation ticked down to about 5%, and 3-month measures are around 3½%. Both will need to come down further, as will short-term inflation expectations, to return inflation to the 2% target.

Today’s press release says, “Governing Council will continue to assess economic developments and the impact of past interest rate increases and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

 

Most economists believe the Bank of Canada will hold the overnight rate at 4.5% for the remainder of this year and begin cutting interest rates in 2024. A few even think that rate cuts will begin late this year.

In Congressional testimony yesterday and today, Federal Reserve Chair Jerome Powell said that the Fed might need to hike interest rates to higher levels and leave them there longer than the market expects. Today’s news of the Bank of Canada pause triggered a further dip in the Canadian dollar (see charts below).

Fed officials next meet on March 21-22, when they will update quarterly economic forecasts. In December, they saw rates peaking around 5.1% this year. Investors upped their bets that the Fed could raise interest rates by 50 basis points when it gathers later this month instead of continuing the quarter-point pace from the previous meeting. They also saw the Fed taking rates higher, projecting that the Fed’s policy benchmark will peak at around 5.6% this year.

Bottom Line

The widening divergence between the Bank of Canada and the Fed will trigger further declines in the Canadian dollar. This, in and of itself, raises the Canadian prices of commodities and imports from the US. This ups the ante for the Bank of Canada.

The Bank is scheduled to make its next announcement on the policy rate on April 12, just days before OSFI announces its next move to tighten mortgage-related regulations on federally supervised financial institutions.

To be sure, the Canadian economy is more interest-rate sensitive than the US.  Nevertheless, as Powell said, “Inflation is coming down, but it’s very high. Some part of the high inflation that we are experiencing is very likely related to a very tight labour market.”

If that is true for the US, it is likely true for Canada. I do not expect any rate cuts in Canada this year, and the jury is still out on whether the peak policy rate this cycle will be 4.5%.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

 

Canadian GDP Slowed Dramatically in Q4 2022, Another Reason the BoC Won’t Raise Rates in March

Latest News Kim Stenberg 28 Feb

Statistics Canada released the real gross domestic product (GDP) figure for the final quarter of 2022 this morning, showing a marked slowdown in economic activity. This will undoubtedly keep the central bank on the sidelines when they announce their decision on March 8. The Bank had estimated the Q4 growth rate to be 1.3%. Instead, the economy was flat in Q4 at a 0.0% growth rate. This was the slowest quarterly growth pace since the second quarter of 2021.

Inventory accumulation in the fourth quarter declined for manufacturing and retail goods, driving investment in inventories to decline by $29.8 billion. Further, higher interest rates by the Bank of Canada hampered investment in housing (-8.8% at an annual rate), and business investment in machinery and equipment was a weak -5.5%. On the other hand, personal expenditure in the Canadian economy expanded by 2.0% (vs -0.4% in Q3), supported by the red-hot labour market. Government spending growth also accelerated. At the same time, net foreign demand contributed positively to GDP growth as exports grew by 0.8% while imports shrank by 12.0%.

The weak Q4 result reduced the full-year gain in GDP for 2022 to 3.4%, compared to 2.1% in the US, 4.0% in the UK, and 3.6% in the Euro area.

The January GDP flash estimate was +0.3%, pointing towards a rebound in the first quarter of this year. However, flash estimates are always volatile and subject to revision. Nevertheless, the growth in GDP this year will likely be much more moderate, less than 1%.

Bottom Line

The weakness in today’s economic data will be good news to the Bank of Canada, having promised a pause in rate hikes to assess the impact of the cumulative rise in interest rates over the past year. Today’s GDP report and the slowdown in the January CPI inflation numbers portend no interest rate hike on March 8.

Now the Bank will be looking for a softening in the labour market.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

 

Canadian Inflation Slows in January Assuring a Rate Pause at March 8 BoC Meeting

Latest News Kim Stenberg 21 Feb

Canadian inflation decelerated meaningfully in January despite the continued strength in the economy. Labour markets remain very tight, and retail sales continue strong. Nevertheless, the Bank of Canada’s jumbo rate hikes over the past eleven months have tempered inflation from a June ’22 peak of 8.1% y/y to 5.9% in January.

The 3-month average growth in the Bank of Canada’s preferred median and trim inflation measures – designed to look through volatility in individual product prices to better gauge underlying price pressures – are running at around 3.5% on a three-month annualized basis. That’s still above the BoC’s 2% inflation target but is well below peak levels last year.

Prices for cellular services and passenger vehicles contributed to the deceleration in the all-items CPI. However, mortgage interest costs and food prices continue to rise.

Last month, inflation excluding food and energy, rose 4.9% y/y. Prices excluding mortgage interest costs rose 5.4%. In both cases, year-over-year price growth was slower than in December. Some of the decline in inflation was due to base-year effects. In January 2022, mounting tensions amid the threat of a Russian invasion of Ukraine, coupled with supply chain disruptions and higher housing prices, put upward pressure on prices.

Monthly, the CPI rose 0.5% in January 2023, following a 0.6% decline in December. Higher gasoline prices contributed the most to the month-over-month increase, followed by a rise in mortgage interest costs and meat prices.

Food prices, however, remain elevated in January (+10.4%) compared to 10.1% in December. Grocery price acceleration in January was partly driven by year-over-year growth in meat prices (+7.3%), resulting from the most significant month-over-month increase since June 2004. Food purchased from restaurants also rose faster, rising 8.2% in January following a 7.7% increase in December.

Bottom Line

The Bank of Canada must feel pretty good about today’s inflation numbers. They confirm the wisdom of their announced pause in rate hikes at the January meeting. Despite continued strength in the labour market and January retail sales, headline and core inflation measures have declined again, with a five handle now on the headline rate. That is still a long way to the 3.0% inflation forecast by the end of this year, but it is moving in the right direction.

There will be no BoC action when they meet again on March 8. Their press release will be scrutinized for a hawkish versus dovish tone. Regardless of upcoming data, there is virtually no chance of any rate cuts this year.

 

Dr. Sherry Cooper
Chief Economist | Dominion Lending Centres

Canadian Jobs Market Booms Despite Rate Hikes

Latest News Kim Stenberg 13 Feb

Today’s Labour Force Survey (LFS) for January was much stronger than expected, once again calling into question how long the Bank of Canada’s rate pause will last. This report showed no evidence that the labour market is slowing in response to the vast and rapid runup in interest rates.

Employment surged by 150,000–ten times more than expected–and most of the gain was in full-time jobs. The employment rate has returned to pre-pandemic levels. Employment rates among people 55 to 64 have been on a solid upward trend since the summer of 2022, mirroring the rise in employment over that period observed among most demographic groups.

Immigration remains a vital factor in hiring. According to the latest population estimates, in the third quarter of 2022, Canada’s population grew the fastest in over 50 years, mainly driven by an increase in non-permanent residents. In the Labour Force Survey, non-permanent residents represent the majority of a larger group, including those who were not born in Canada and have never been landed immigrants. Non-permanent residents can hold various kinds of work, study, or residence permits. On a year-over-year basis, employment for those not born in Canada and who have never been a landed immigrant was up 13.3% (+79,000) in January, compared with growth in total employment of 2.8% (+536,000).

Average hourly wages rose 4.5% on a year-over-year basis in January, down from 4.8% in December. This is good news for the inflation outlook, but it remains much above the 2% target. Year-over-year wage growth reached 5.0% in June 2022 and peaked at 5.8% in November (not seasonally adjusted).

The unemployment rate remained near a record low, holding steady at 5.0% in January, just shy of the record-low 4.9% in June and July last year.

Employment growth was most robust in wholesale and retail trade, healthcare, education, other services and construction.

 

 

 

 

 

Bottom Line

The Canadian jobs market is showing no signs of slowing. This has to make the Bank of Canada at least a bit nervous. The US jobs market data in January was also robust, and the Fed Chairman, Jay Powell, has assured markets that interest rates are likely to rise further.

This is the last jobs report before the Bank of Canada meets again on March 8. The CPI data for January will be released on February 21 and will be the primary factor determining Bank action. If inflation continues to decline, as expected, the rate pause will hold. If not…

 

Dr. Sherry Cooper

Chief Economist | Dominion Lending Centres

BANK OF CANADA RATE ANNOUNCEMENT: 0.25 Rate Hike, Signalling a Pause

Latest News Kim Stenberg 25 Jan

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

Canadian Inflation Pressures Ease in December

Latest News Kim Stenberg 18 Jan

Good News on the Inflation Front in December

The Consumer Price Index (CPI) rose 6.3% year over year in December, down from the 6.8% pace in November. Much of the decline was owing to the drop in gasoline prices. Additional deceleration came from homeowners’ replacement costs, fuel oil and other owned accommodation expenses, and various durable goods. Slower price growth was offset by increases in mortgage interest cost, clothing and footwear and personal care supplies and equipment.

Excluding food and energy, prices rose 5.3% yearly last month, down only 0.1% from a gain of 5.4% in November.

The global slowdown and surging COVID cases in China contributed to the decline in crude oil prices, depressing the price of gasoline and fuel oil.

Easing supply chain pressures, lower shipping costs, and softer demand contributed to the slowdown in the price inflation for appliances and furniture.

For the third month in a row, yearly price growth slowed for passenger vehicles (+7.2%), which may reflect slowing demand for used cars.

On a year-over-year basis, homeowners’ replacement cost (+4.7%) and other owned accommodation expenses (+2.5%) continued to slow as the housing market continued to cool, putting downward pressure on the CPI.

The mortgage interest cost index continued to put upward pressure on the CPI amid the ongoing higher interest rate environment, rising 18.0% yearly in December following a 14.5% increase in November.

Food price inflation remained high last month at 11% compared to 11.4% in November. Food price growth has hovered around 11% over the previous five months.

 

 

The core CPI metrics slowed (see chart below), but only inappreciably. Two key yearly measures tracked closely by the central bank — the so-called trim and median core rates — edged lower, averaging 5.15% from an upwardly revised 5.25% a month earlier. Economists were expecting a reading of 5.05%.

 

One significant concern of the Bank of Canada is inflation expectations that cause workers to demand higher wages and businesses to pass through higher costs on to the consumer. The Bank’s latest surveys show that consumer and business expectations of inflation remain elevated.

According to the Bank’s consumer survey, “Yet consumers are still concerned about inflation, and some are uncertain about the effectiveness of tightening monetary policy. More than three-quarters of people understand that the Bank aims to reduce inflation by raising interest rates. But the share of those who believe that increasing rates will lead to lower inflation remains small at around two-fifths of respondents.”  Consumers appear to believe that inflation will be at just over 5% two years from now, well above the 2% target.

Bottom Line

The dramatic monetary tightening in the past nine months has slowed headline inflation. The decline in December, however, was primarily due to seasonality and a significant drop in gasoline prices. Core inflation eased only marginally. Underlying price pressures remain sticky. The Bank of Canada will likely hike rates by another 25 bps at next week’s meeting. Beyond that, the Bank might pause, at least for a while, depending on the incoming data.

It won’t surprise me if they resume their tightening later this year. I do not expect any rate reductions in 2023.

 

Dr. Sherry Cooper
Chief Economist | Dominion Lending Centres

 

 

Blockbuster Canadian Jobs Report Raises Odds of a 25 bps Rate Hike on Jan 25th

Latest News Kim Stenberg 6 Jan

Employment Report Ended 2022 With A Boom

 

Today’s Labour Force Survey for December was much stronger than expected, raising the odds of a 25 bps increase in the policy rate by the Bank of Canada on January 25th. While the Bank has hiked rates by 400 bps to 4.25%, core inflation remains sticky, wages have risen by more than 5% for the seventh consecutive month in December, and Q4 GDP is running well above the Bank’s forecast of 0.5%.

Employment rose by 104,000 last month, and the unemployment rate fell to 5.0%–just above the 50-year low of 4.9% posted in June and July. Indeed, the jobless rate would have fallen even further had the labour force participation rate not ticked upward as discouraged workers re-enter the jobs market when vacancies are plentiful. Employment rose the most for youth and people aged 55 and older.

Throughout 2022 the employment rate of core-aged women hovered around record highs. On average, 81.0% of core-aged women were employed, the highest annual rate since 1976 and 1.3 percentage points higher than in 2019.

Much of this increase has been among women with young children. On average, during 2022, 75.2% of core-aged women with at least one child under six years of age were working at a job or business, up 3.3 percentage points compared with 2019.

The increase in employment in December was driven by full-time work, which rose for a third consecutive month.  Full-time work also led employment growth for the year ending in December 2022.

Employment rose in multiple industries, notably construction, transportation, and warehousing.

Job gains were reported in Ontario, Alberta, BC, Manitoba, Newfoundland and Labrador, and Saskatchewan.  There was little change in the other provinces.

 

Bottom Line

The Canadian economy has also been boosted by strength in the US, where nonfarm payroll employment rose by 223,000 in December, and the unemployment rate fell to 3.5%, matching a five-decade low.

Governor Tiff Macklem and his officials have slowed down the rate hikes (from 75 bps to 50 bps) and signalled that future decisions would depend on economic data. Indeed, the most recent GDP and today’s jobs report point to continued economic strength. The October and November gains in GDP suggest Canada’s growth is holding up better than expected. The economy is on track to expand at an annualized rate of 1.2% in the fourth quarter, exceeding the central bank’s expectations.

The December CPI report will be released on Jan 17, ahead of the Jan 25 Bank of Canada decision. That will be closely watched as well.

In other news, housing market activity continued to slow in December. Home sales plummeted in the country’s largest metro areas by 30%-to-50% as buyers and sellers moved to the sidelines. Housing is the most interest-sensitive sector and has been slowing since the Bank began hiking interest rates last March.

Greater Vancouver led the way, with sales falling 52% year-over-year, while the Greater Toronto Area saw a 48% decline. Montreal followed with a 39% annual decline, whereas sales were down 30% in both Calgary and Ottawa.

Average prices continued to fall in most of the metro areas. The MLS Home Price Index benchmark is now down 9% year-over-year in the Greater Toronto Area. In Calgary, however, average prices remain nearly 8% above year-ago levels.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

Canadian Inflation Disappointingly High in November

Latest News Kim Stenberg 21 Dec

The Bank of Canada Won’t Like This Inflation Report

November’s CPI inflation rate fell only one tick to 6.8%, despite gasoline prices falling. This follows a two-month reading of 6.9%. Excluding food and energy, prices rose 5.4% yearly last month, up from 5.3% in October. Critical gauges of underlying price pressure were mixed but continued to creep higher. The all-important three-month trend in Core CPI edged to a 4.3% annualized rate from 4.0% the month before.

This is not good news and does nothing to assuage the central bank’s concerns about inflation. Price pressures remain stubbornly high, even as the economy slows and higher borrowing costs start to curb domestic demand.

Slower price growth for gasoline and furniture was partially offset by faster mortgage interest cost and rent growth. Headline inflation fell just one tick to 6.8% following two months at 6.9%, and core inflation remains sticky.

Digging into the still-strong core results revealed some new areas of concern. After years of helping hold back inflation, cellular services rose 2.0% y/yon “fewer promotions,” while rent took a big step up and is now at a 30-year high of 5.9% y/y (from 4.7% last month). Mortgage interest costs are another driving force, rising 14.5%, the most significant increase since February 1983. Just six months ago, they were still below year-ago levels. The transition from goods-led to services-driven inflation continues apace, with services prices up 5.8% y/y, or double the pace a year ago.

Prices for food purchased from stores rose 11.4% yearly, following an 11% gain in October.

 

 

 

Bottom Line

Before today’s report, traders were pricing in a pause at the next policy decision, with a possibility of a 25 basis-point hike. Barring an excellent inflation report for December, another rate hike is likely on January 25, likely a 25 bp hike. Given what’s happened in the first three weeks of this month, there is a good chance that the almost 14% drop in gasoline prices (compared to a 4% decline in December a year ago) could pull this month’s headline inflation down to 6.5%. However, many components of core inflation continue to rise.

While the BoC will slow the rate hikes in 2023, at least two or three more hikes are still possible, with no rate cuts likely next year. Remember, wage inflation is running at 5.6% y/y, and wage negotiations are getting more aggressive.

 

Dr. Sherry Cooper | Chief Economist, Dominion Lending Centres

 

 

 

 

 

BANK OF CANADA RATE ANNOUNCEMENT: Ends 2022 With Another Interest Rate Hike

Latest News Kim Stenberg 7 Dec

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by 50 basis points today to 4.25% and signalled that the Council would “consider whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target”. This is more dovish language than in earlier actions where they asserted that rates would need to rise further. Some have interpreted this new press release to imply that the Bank of Canada will now pause or pivot. I disagree.

I expect there will be additional rate hikes next year, but they will be more measured and not on every decision date. I also feel that the Bank will refrain from cutting the policy rate until 2024.

The Bank told us today that the “longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched”. CPI inflation remained at 6.9% in October, “with many of the goods and services Canadians regularly buy showing large price increases.

Measures of core inflation remain around 5%. Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum. However, inflation is still too high, and short-term inflation expectations remain elevated”.

The economy remains in excess demand, and the labour market is very tight. The jobless rate in November fell to 5.1%, and job vacancies increased in September. Wage inflation came in at 5.6% y/y in November for the second consecutive month, marking six straight months of wage inflation above 5%. While headline and core inflation have moderated from their recent peaks, they exceed the 2% target by a large measure.

The Bank will monitor incoming data, especially regarding the overheated labour market where the jobless rate is at historic lows. Housing has slowed sharply in recent months, but as long as labour markets are tight, a slowdown in other sectors will be muted. The Bank now says it expects the economy “to stall” in the current quarter and the first half of next year.

Bottom Line

This will likely be the last oversized rate hike this cycle. The Governing Council next meets on January 25. Whether they raise rates will be data-dependent. If they do, it will likely be by 25 bps. Even if they pause at that meeting, it does not rule out additional moves later in the year if excess demand persists. I expect further monetary tightening, the continued bear market in equities, and a further correction in house prices.

Canadian benchmark home prices are already down nearly 10% nationwide. Several chartered banks told us this week that more than 25% of the remaining amortizations for their residential mortgages are 35 years and more. At renewal, these institutions expect to grant mortgages amortized at 25 years, which implies a substantial rise in monthly payments. That may well be three or four years away, but clearly, many households could be pinched unless mortgage rates plunge in the interim. I do not see the policy rate falling to its pre-COVID level of 1.75% over that period because inflation back then was less than 2%, an improbable circumstance as we advance. Although supply constraints may be easing, globalization has peaked. Semiconductors produced in the US will not be as cheap, and many rents, prices, and wages will be very sticky.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres

 

Little Comfort for the Bank of Canada in Today’s Jobs Report

Latest News Kim Stenberg 2 Dec

Today’s Labour Force Survey for November will do little to assuage the Bank of Canada’s concern about inflation. While employment growth slowed to 10,100 net new jobs–down sharply from October’s reading–the report’s underlying details point to excess labour demand and rising wages. This is compounded by Monday’s data release showing that the Canadian economy grew by 2.9%, double the rate expected by the Bank of Canada. Everyone expects a slowdown in the current quarter and a modest contraction in the new year. However, excess demand is still running rampant in almost everything except housing.

Indicative of hiring strength, full-time employment was up a robust 50,700, and the private sector added 24,700 jobs. The jobless rate ticked down for the second consecutive month to 5.1%–well below the 5.7% rate posted immediately before the pandemic, which was considered full employment at that time. Total hours worked edged up, consistent with growth in the fourth quarter. And most notably, wage inflation came in at a year-over-year pace of 5.6% in November, the sixth consecutive month of greater than 5% wage inflation. Moreover, private and public sector unions demand even more significant wage gains as inflation remains close to 7%.

Businesses report difficulty filling jobs as job vacancies rose in the latest reading. The employment rate among core-aged women reached a new record high of 81.6% in November.
Employment rose in finance, insurance, real estate, rental and leasing, manufacturing, information, culture, and recreation. At the same time, it fell in several industries, including construction and wholesale and retail trade.

While employment increased in Quebec, it declined in five provinces, including Alberta and British Columbia.

 

 

 

Bottom Line

Today’s data are the last key input into the Bank of Canada’s December 7 interest rate decision. Overnight swap markets are fully pricing in a 25 basis-point hike next week, with traders putting about a one-third chance on a 50 basis-point move. Rising wages show no sign of cooling, and the economy posted much more robust growth in the third quarter than the Bank expected.

The overnight policy rate target is currently at 3.75%. If I were on the Bank’s Governing Council, I would vote for a 50-bps rise to 4.25%. Returning to a more typical 25 bps rise is premature, given inflation is a long way above the Bank’s 2% target. Inflation will not slow, with consumers and businesses expecting continued high inflation. Wage-price spiralling is a real risk until inflationary psychology can be broken.

In either case, additional rate hikes early next year are likely. Even when the central bank pauses, it will not pivot to rate cuts for an extended period. Market-driven longer-term interest rates have fallen significantly as market participants expect a recession in 2023. Fixed mortgage rates have fallen as well. The inverted yield curve will remain through much of 2023, with a housing recovery in 2024.

 

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
« First…34567…10…Last »