Bank of Canada interest rate forecast report

Finder BoC report: Canada’s largest overnight rate report

Key findings

• Most participants (89%) correctly predicted the overnight rate would increase March 2
• On average, the experts are predicting 4 rate rises this year
• Most economists (71%) see the highest rate in the next three years being between 2% to 2.5%
• Economists predict the highest rate that the Canadian economy could handle this year is 1.65%.
• Majority of economists (83%) have a negative outlook towards housing affordability over the next 6 months.

Meet the panel: Expert forecasts ahead of the March 2 decision

The March 2 decision

After two years of the Bank of Canada keeping the overnight rate at the effective lower bound, nearly all panellists surveyed (17 of 19) for the Finder Overnight Rate Report correctly predicted the BoC would raise the rate on March 2, 2002, when the Bank raised the key interest rate to .05%. Despite growing geopolitical concerns, it seems high inflation is causing support for rate hikes to bring some balance to the economy.

Since we are currently in an environment of potentially several rate increases to curb inflation, attention has turned to how many times the rate will be raised this year.

Turns out, on average, economists are predicting the overnight rate will be raised 4 times this year.

Brett House, deputy chief economist at Scotiabank, shares how and when the Bank of Canada is likely to raise rates in the coming months and years.

“Scotiabank Economics forecasts that the Bank of Canada will raise its benchmark policy rate to 2.00% by end-2022 and 2.50% by mid-2023. According to our forecasts, and in line with consensus forecasts, this would still leave Canada’s key policy rate below the headline rate of inflation. Rather than being hawkish, our forecast rate path would still leave monetary policy in an accommodative stance even though price and wage pressures remain strong. Our forecast is in line with the actions needed to bring inflation back toward its target at the end of the standard two-year forecast horizon.”

Taking a longer term view, we asked the panel how high the rate could rise in the next three years and the majority of the economists (71%) think the highest the rate will go between now and 2024 is between 2% to 2.5%.

You may also read: Home Equity Loans: Your Ticket to a Dream Home Renovation in Canada!

How much of a raise can the Canadian economy ‘handle’ in 2022

With several rate raises expected, and millions of Canadians heavily indebted, many experts are speculating about what interest rate the Canadian economy can feasibly ‘handle’ this year.

Well it isn’t a dramatic rise in rates, but rather a gradual increase to an average of 1.65% that experts believe the Canadian economy could handle – an increase of nearly 1.5bp from where the rate has held for nearly two years.

Angelo Melino, professor at the University of Toronto, had a prediction for what the Canadian economy could handle in 2002 that was very close to the average at 1.5%, stating debt concerns saying, “A lot of debt has been accumulated since the onset of the pandemic and the Canadian economy will be more sensitive to interest rate increases than in the past.”

Murshed Chowdhury, associate professor at University of New Brunswick, was one of the most cautious experts when it comes to this year’s rate rises citing pandemic risks,

“The scar from the COVID is still ongoing; the BoC needs to maintain the momentum of an economic rebound. Moreover, the impact of COVID is uneven across populations. The political tensions in Russia-Ukraine may also hurt the economy. Therefore, an increase in interest rate too much within a short period may drag the economy down.”

Derek Holt, VP & head of capital markets economics at Scotiabank is one of the experts who believes the rate could stand to go a bit higher to 2.5% than the average response, saying, “While we forecast that the BoC will still be below the neutral policy rate by the end of this year, the fact the economy is pushing into excess demand suggests we should be seeking a faster return to a neutral rate if not overshooting it.”

Can the BoC successfully contain inflation by raising the interest rate?

While inflation is one of the major factors widely cited as a reason to increase interest rates, the question is, will raising the overnight rate actually be able to curb inflation rates in reality?

Well the vast majority of our experts are confident rate hikes WILL indeed curb inflation.

Eleven experts, or almost two-thirds of respondents (61%), believe that the BoC can successfully contain inflation by raising the overnight rate while the remaining nearly one-third don’t believe the BoC raising rates will contain inflation.

Moshe Lander, senior lecturer of economics at Concordia University, is one of the panellists who is optimistic the Bank of Canada raising rates will contain inflation.

“There is no limit to how high the Bank of Canada can raise interest rates and there is no limit to how far those increases can push the economy into recession. At some point, it will alleviate inflationary pressures. Hopefully, the transitory nature of these supply-side disruptions will not trigger a wage-price spiral making the Bank have to increase rates higher than necessary.”

Atif Kubursi, president and emeritus professor, at Econometric Research and McMaster University, calls out the necessity for the Bank to employ rate hikes to contain inflation, “Fiscal policy should assist in easing supply chains problems and constraints. We are now at a juncture where coordination of both policies in the fight against inflation is necessary and critical.”

Dominique Lapointe, senior economist at Laurentian Bank Securities is one of the minority who believes, at least in the short term, that the Bank of Canada’s rate hikes this year will not have as much of an impact on inflation.

“The BoC can partially contain inflation by raising rates, assuming they raise rates with other central banks at the pace over which we forecast. Pandemic-related sources of inflation and the current war in Ukraine unfortunately continues to lift inflationary pressures. These can’t be put out easily with a moderate pace of rate hikes. That being said, if these issues settle down, inflation would come down.”

Housing Outlook

The Canadian housing market has been overheated for years and many might say a decade. This has been due to low-interest rates and a supply issue that persists. With the Bank of Canada expected to hike rates this year we asked our experts if this could see prices deflate.

The vast majority of our experts did not see a single rate raise putting any downward pressure on residential housing prices. While the remaining quarter of experts were divided at 8% each about whether prices would decrease after 1 month, 1 year or if they would actually increase after a rate increase.

Of the majority who think a single rate rise won’t affect prices. Will Dunning of Will Dunning Inc explains more sizeable rate rises are needed to move market prices, stating “We need a rise of 3/4 of a point just to remove the inflationary effects from asset markets.”

Carl Gomez, chief economist and head of market analytics, agrees a single rate rise won’t decrease prices, stating,

“Rates are still extremely low. Many potential homebuyers have also locked in a rate. If anything, the rate increase will induce people to go out and buy houses even more so to take advantage of the current low rate. This will push prices even higher over the near term.”

Tony Stillo, director of Canada economics for Oxford Economics, explains the macroeconomic picture for why he believes a single rate raise won’t decrease rates.

“Our forecast for a 100 bpt rise in Canada’s overnight rate to 1.25% by the end of 2022 will help cool housing demand, but financial market expectations for a much more aggressive 150-175 bps hike in the policy rate by year end would lead to a significant housing slowdown, and increase the risk of a broader economic downturn.”

Philip Cross, senior fellow at MacDonald Laurier Institute is in the minority who thinks residential housing will increase following a rate hike, stating “usually the start of rate hikes leads people sitting on the fence to rush into the market before further hikes”.

Nikola Gradojevic, professor of finance at the University of Guelph is the single expert who believes the rate could rise after only one month.

“It typically takes a couple of weeks for the mortgage rates to react to interest rate changes. Hence, it would take another couple of weeks or more for the real estate prices to start increasing.”

Economic outlook

We asked the panel about whether they felt positive, neutral and negative about six major economic markers over the next 6 months.

The most negative outlook was unsurprisingly about housing affordability, with the majority of economists (83%) having a negative outlook over the next 6 months.

While cost of living and household debt were also viewed negatively, economists were most positive about wage growth followed by wage growth.

Source: https://www.finder.com/