After weeks
of favourable predictions that the Bank of Canada would end its aggressive rate
hike cycle, some in the industry are changing their tune, cautioning of
possible further rate hikes on the horizon.
In a new
report from BMO Economics, Chief Economist Douglas Porter notes that although
the Bank of Canada may be finished hiking its policy rate, “the market is now
giving high odds to one more move.”
And Porter
isn’t entirely alone in his predictions. Derek Holt, Scotiabank’s Vice-President
and Head of Capital Markets Economics said late last week, in a piece for The Global
and Mail, that although a rate hike in March is “out of the question,” we
shouldn’t “rule out a return with another hike as soon as April. ”
Both Ipsos
Senior Vice President Sean Simpson and Toronto Regional Real Estate Board
(TRREB) Chief Market Analyst Jason Mercer referenced these newer predictions
during TRREB’s 2023 Market Outlook Event held on Friday, explaining how they
could come to fruition. Largely, Mercer says, the likelihood of a rate hike will
be tied to how job performance and consumer spending trends play out in the
near term.
“It’s really
going to be a balancing act,” Mercer said. “On the one hand, if you look at
overall economic growth in Canada, that’s started to moderate, yet we’re still
seeing firms bring on new employees. Part of that has to do with the fact that
there’s so many job vacancies right now […] and so the question is going to be
if a firm brings on these new employees, but because of some hesitancy, higher borrowing
costs, and what have you, are you not going to see a huge uptick in consumer spending?
Well, then that won’t have as much of an impact on inflation, versus if we see
jobs continue to increase and we see consumer spending increase in lockstep and
that could be inflationary, and that would pose a risk for continued rate
hikes.”
This
rhetoric is a noticeable shift from the general narrative that’s been flouted
by many industry leaders in recent weeks, predicting that the bank’s January
rate hike, which brought the BoC policy rate to 4.5%, would be its last before
cutting rates later this year.
During the rate
announcement, even the BoC itself confirmed this stance, saying “If economic
developments evolve broadly in line with the MPR outlook, Governing Council
expects to hold the policy rate at its current level while it assesses the
impact of the cumulative interest rate increases.”
The BoC did
add a caveat that the Governing Council will increase rates further if
necessary, but went on to say that “inflation is projected to come down
significantly this year,” including a low likelihood of another hike.
Mercer
acknowledge the bank’s position, but noted that “they’ll have to take a bit of
a wait and see attitude to see how things pan out,” adding, “I think one month’s
data probably won’t be enough to sway them, but it’s certainly going to be
something they’re keeping an eye on.”
Canada’s sky-high
inflation – the prime target of rising interest rates – appears to have peaked,
having dropped to 6.3% last month – its lowest level since February 2022.
Although this marked yet another month of lower inflation, the 6.3% is still a
far cry from the BoC’s target of 2%.
Even still,
many are forecasting rate cuts in 2023. Earlier this month, the BoC published
the results of its Market Participants Survey, based on responses from roughly
30 financial market participants, including senior economists and strategists
at banks, pension funds, asset management firms, and insurance senior
economists and strategists at banks, pension funds, asset management firms, and
insurance companies. The median response from participants was an expectation
that the BoC will cut interest rates by 25 basis points in October and again in
December, bringing the policy rate down to 4% by the end of the year.
These
conflicting, and often quickly changing, forecasts can be understandably
confusing to consumers and frankly, all go to show that predictions are exactly
that – predictions. There’s anything but certainty to be had when it comes to
ever-changing market conditions, and there’s likely to be a flurry of opinion
shifts ahead of the next interest rate announcement, scheduled for March 8.
Written
By: Laura Hanrahan
Source
By: STOREYS