Today’s 50-basis-point overnight interest rate hike came as no surprise to Canadian economists.
Of course, the move follows six previous hikes over the past year from the Bank of Canada (BoC), as the country’s central bank relentlessly tries to battle sky-high inflation that’s left countless Canadians struggling to pay their bills.
According a recent report from comparison platform and information service Finder, everyone on a panel of 15 economists and industry experts anticipated another rate increase in advance of the BoC’s announcement today. A total of 80% of these experts anticipated a 50-basis-point (bp) increase. The silver living for cash-strapped Canadians? None of the Finder panel of experts expected a BoC rate increase greater than 50 bps. A minority of Finder experts (20%) predicted a 25 bps hike at this morning’s announcement.
The most recent rate hike comes at a time when the climbing cost of consumer goods is taking a serious toll on the bank accounts -- and credit cards -- of Canadians from coast to coast. The BoC’s vigilant fight against inflation was the main reason most experts believed the bank would raise rates by 0.50% one last time in 2022.
"The economy continues to push into excess demand with employment at a record high amid accelerating wage pressures and weak productivity,” explains Derek Holt, Vice President and head of Capital Markets Economics at Scotiabank. [As a result], inflation risk remains high." Philip Cross, senior fellow at the Macdonald Laurier Institute, added that while "inflation may have peaked [in 2022] but [threatens] to stay elevated."
Sebastien Lavoie, chief economist with Laurentian Bank Financial Group, agrees. He believes that because high inflation could become entrenched, the BoC needs to continue to put pressure on rampant spending. "Uncertainty about the impact of past tightening…ultimately requires further hikes, particularly since demand has not fallen enough to cool inflation in a comfortable way for the BoC. Accordingly, a 25 bps hike in December does not appear enough in our view."
However, 40% of Finder experts who believed the Bank should not raise rates in December or, at the very least, cap the rate hike at 25 bps, cited a need for more caution due to the high probability of a recession, fears of widespread job loss and heavily indebted Canadians.
London Canada, August 18 2019: Canadian money and Credit Cards. Editorial concept of finance, debt, and money management.
Murshed Chowdhury, associate professor at the University of New Brunswick, highlights the dangers of rising debt. "Household indebtedness is increasing, and the Bank needs to take a cautious approach as the impact of the rising interest rate is heterogenous across households. Therefore, the [Bank] needs a good balance between over and under-tightening monetary policy,” he says.
The big question on everyone’s mind is when the Bank will finally pivot. During this rising rate environment, the Finder report highlights how there’s been a widespread devaluation of assets, like stock portfolios and housing. At the same time, the rising cost of debt cut into household budgets. Given the ongoing difficulties faced by many Canadians, more than half of Finder’s experts (53%) didn’t anticipate another rate hike at the January 2023 BoC announcement. In the last 12 months, this is the first time economists and experts did not anticipate a change in the central Bank’s overnight rate.
"Given how much Canadians have been through already in 2022, the Bank might lay off a little and only increase the overnight rate by 25 basis points -- to send a mild signal that its work is not done and accompany it with a message that more hikes will come in 2023," explains Senior Economics Lecturer at Concordia University, Moshe Lander.
Carl Gomez, Chief Economist with CoStar Canada, doesn’t believe the Bank will continue its rate hikes into 2023. “The Bank is likely to tolerate one more big rate increase, to maintain its credibility on inflation, but with the full impact of past rate hikes not fully felt, and the potential for the economy to slip into a moderate but increasingly deeper recession, the Bank is likely very close to pivoting and holding rates steady."
To assess the impact of Canada’s interest rate forecast, Finder’s expert panel was asked to review the direction of five significant economic indicators over the next six months. Not surprisingly, 100% anticipated housing price decreases heading into 2023, and another 85% predicted higher unemployment numbers, with almost two-thirds (60%) expecting this to translate into slow or stagnant wage growth. Almost all economists ( 93%) expected a continued rise in the cost of living over the next six months, and more than half (60%) see household debt rising.
The report highlights how the risk of a recession rises as inflation slowly recedes and how the Bank of Canada has reinforced that their aim is to return inflation to the desired 1% to 3% range. As Finder reports, based on the decisions made over the last year by the BoC, half of the expert panel believed the Bank would not reach its goal until 2024 or beyond. The other half of the expert panel believed the Bank’s success would happen sooner — either sometime in 2023 or at the beginning of 2024.
Nikola Gradojevic, professor of Economics at the University of Guelph, is convinced the BoC will not achieve its goal until 2024 and beyond. "Growth in Canada is mostly demand-side driven,” she says. “The problem is that Canada’s government is still fueling demand with various benefits that drive up inflation. Thanksgiving and Christmas seasonal shopping effects are adding more fuel to the fire. Hence, the Bank of Canada will be forced to try to bring inflation down with higher interest rates."
With an impending recession all but inevitable -- even if it’s mild -- experts are naturally beginning to watch unemployment rates. Nearly three-quarters (73%) of Finder’s experts predict widespread unemployment in 2023. "Tighter monetary policy will slow growth,” explains Angelo Melino, an economics professor at the University of Toronto. “I expect job openings to contract sharply, with modest but broad-based declines in employment in 2023.”
Tony Stillo, director of Canada Economics, a firm that produces the Oxford Economics’ forecast which tracks unemployment and recession trends, believes Canada could start entering a recession before the year ends. Through their analysis, Canada Economics is forecasting a 1% decline in total employment for the upcoming recession. This is less than the average 1.6% drop of past recessions.
"In a post-pandemic environment of elevated job vacancies and widespread labour shortages, we think firms will decide to hold onto hard-to-find workers, limiting the decline in employment relative to past downturns…Accordingly, while we expect the unemployment rate to rise in the coming quarters, we don’t foresee as high of a peak as in past downturns…In our forecast, the unemployment rate is set to rise 3.1% over a longer period of seven quarters, peaking at 8.2% by Q1 2024,” said Stillo.
Taylor Schleich, rates strategist with National Bank of Canada, believes there will be some job losses, but they won’t be widespread. “Hiring freezes may be more likely,” says Schleich. “Given labour scarcity over past years, there may be reluctance to shed jobs outright.”
Naturally, the housing market is front and centre in talks of the perpetual interest rate hikes. Last month, the Canadian Real Estate Association (CREA) reported that home sales were up slightly (1.3% month-over-month), after more than half a year of declines. Despite this small uptick in sales activity, Finder’s expert panel still considers Canada’s real estate market to be in a downturn going into 2023, and even into 2024.
When it comes to Canada’s dramatic real estate market, 71% of Finder’s panel of experts expect the average rental price to increase in the first half of 2023; 85% anticipate that housing starts will continue to decrease throughout 2023; 62% believe decreasing housing starts will have no direct impact on home prices in 2023; 64% anticipate interest rates will continue rising in 2023; and 92% forecast rising mortgage rates will continue to push home prices down.
“Year-over-year housing price declines were almost 10% in October 2022 and a rebound doesn’t look promising for 2023,” explains Romana King, senior finance editor with Finder. “The Bank of Canada still has more work to do, when it comes to curbing inflation, and higher borrowing costs combined with higher prices for consumer goods and services means persistent affordability problems for potential home buyers. This doesn’t mean homeowners should brace for a housing market crash. Despite the increased cost of mortgage debt, a persistent lack of housing supply means price declines will be tempered by a steady percentage of Canadians still looking to buy a home.”