The Bank of Canada indicated yesterday that it’s prepared to raise interest rates again if required – but its acknowledgement that the economy is slowing substantially is a positive sign, according to Canadian Imperial Bank of Commerce (CIBC) deputy chief economist Benjamin Tal.
The central bank left its policy rate untouched for a second consecutive month in its October 25 decision, holding that trendsetting rate steady at 5.0% while also emphasizing that further rate hikes could be on the cards.
Still, its optimistic tone on the labour market – where it said job vacancies and employment gains were easing – suggested it believes it can afford to leave rates where they are barring major negative developments, according to Tal.
“They maintained hawkish language which makes sense, because… this is a biased bank,” he told Canadian Mortgage Professional. “They just cannot keep you relaxed about interest rates. They have to keep you guessing. That’s exactly what they’re doing: they’re admitting that the economy is slowing down, and that’s a good thing.
“Overall, I think [the decision is] no big surprise. It’s a Bank that’s willing to raise again if needed. The focus is inflation, the focus is the labour market – but they admit that the past hikes in interest rates are impacting the economy.”
Could stickier-than-expected inflation prompt another rate hike?
The central bank’s 10 rate hikes since March 2022, which have spiked its benchmark rate by 475 basis points, are “dampening economic activity and relieving price pressures,” it said in its Wednesday statement.
However, inflation remains a significant concern, with the Bank noting that its preferred measures of core inflation do not appear to be ticking downwards. It still expects consumer price index (CPI) inflation to hit its 2% target in 2025 – but next year is now projected to see higher inflation than previously anticipated, averaging around 3.5% through the middle of next year.
Tal said the Bank is probably striking a mostly cautionary tone on inflation, with current trends unlikely to convince it a further rate increase is required.
“I don’t think that at this point they’re ready to raise interest rates on that,” he said. “I think they realize that it’s a lagging indicator and it takes time for it to slow down. [They’re] focusing totally on the labour market, and there are clear signs that the labour market is tight, starting to move in the right direction.
“If you look at the quit rate, if you look at vacancies, they’re falling very quickly, so I think they realize that it’s just a question of time until this will be translated into the labour market and wage pressure. I think they’re willing to wait at this point but in the language, they cannot tell you that. In the language, they will have to remain hawkish.”
Tal and CIBC believe the Bank of Canada will begin cutting rates in the middle of 2024, and that its benchmark rate will probably end up at around 3% by the end of 2025.
What’s next for the housing market?
The Bank’s pause on rate hikes earlier this year spurred something of a national housing market revival, one that was swiftly quelled by back-to-back increases in June and July.
A repeat is unlikely to play out despite its rate remaining unchanged for the last two announcements, Tal said.
“I don’t see a surge in activity, quite frankly,” he said. “I think that it will be different between the first pause, that was in January of this year, and this pause. I think that the market is bruised enough from this increase in interest rates.”
The Bank highlighted the impact on the economy of a surge in Canada’s population, which it said was helping ease labour market pressures in certain sectors while also contributing to higher consumption and housing demand.
“The question is whether or not new immigrants and newcomers are inflationary,” Tal said. “On the one hand, they’re adding to supply of labour and therefore reducing wage pressure. On the other hand, they consume.
“I think at the margins, they are inflationary in the short period of time and the Bank of Canada knows that we would have been in a recession without the increase in immigration. So they have to recognize this very huge contributor.”
Overall, Tal said despite the Bank’s continually aggressive stance on the prospect of further rate hikes, its October statement contained some encouraging indicators that the end may be in sight.
“At the end of the day, we have to remember that this is a biased bank, so the language will be hawkish regardless of what they do,” he said. “But they started to indicate that the economy is slowing, which is good [and] very important. It’s an indication that they know it’s just a question of time.”
Source CMP
By Fergal McAlinden