Another Bank of Canada rate hike likely in September: CIBC's Tal

Another jump could be on the way – but it would mean rate cuts arrive sooner, economist says

Another Bank of Canada rate hike likely in September: CIBC's Tal

The Bank of Canada hiked interest rates yet again in its July decision yesterday – and it’s unlikely to be the last increase of 2023, according to a leading economist.

Benjamin Tal (pictured), deputy chief economist at CIBC World Markets, told Canadian Mortgage Professional that a surprisingly hawkish statement by the central bank had paved the way for another 25-basis-point hike in September, a move that would bring the trendsetting rate a full 5% above its March 2022 level.

The Bank said it expected inflation to return to its 2% target by the middle of 2025 – a longer timeframe than it had previously indicated was likely.

“This is opening the door for another move in September,” Tal said. “Our official call is now that the Bank of Canada is going to move again, unfortunately, in September by 25 basis points, and that maybe will be the end of it.”

Those looking for good news in that scenario may find it in the likelihood that another increase in September would push forward the timeline for rate cuts down the line, according to Tal.

“We have to realize that we are already in a process of, in my opinion, overshooting – maybe by design by the Bank of Canada,” he said. “But it also means that if you overshoot, you accelerate the process of cutting.”

Bank of Canada playing an “asymmetrical game”

The Bank might have been able to keep rates at an elevated level for a longer period if it hadn’t hiked again yesterday, Tal said – but moving above 5% would mean a stronger-than-expected economic slowdown that would open the door for quicker cuts.

“We have to realize that this is an asymmetrical game, namely a situation in which the Bank of Canada is getting mixed signals from the economy,” he explained. “Some signals suggest that the economy is strong, some suggest that the economy is reacting to higher interest rates and slowing down, especially the housing market.

“At the same time, they put much more weight on the positive numbers as opposed to the negative numbers because if they have to make a mistake, they’re going to make the mistake of overshooting as opposed to undershooting.”

Overshooting can be corrected by swiftly lowering interest rates, he added, while undershooting is more difficult to correct because it means tackling inflation – which, as shown over the past year, has proven easier said than done.

How is the Bank of Canada assessing economic trends at present?

The Bank said on Wednesday that it expected consumer spending to slow in the face of its spate of rate hikes over the past 16 months, but also highlighted “more persistent excess demand” in the economy displayed by retail trade and other data.

The central bank’s governing council “remains concerned that progress towards the 2% [inflation] target could stall, jeopardizing the return to price stability,” it said.

That’s despite encouraging progress in the consumer price index from a 39-year high of 8.1% last summer to 3.4% by May.

On the housing front, price pressure was resulting from demand outpacing new construction and real estate listings, the Bank added, while “tight” labour market conditions were seeing wage growth continue to hover around the 4-5% mark.

Mixed signals in the jobs market saw the unemployment rate tick slightly upwards to 5.4% in June despite the addition of tens of thousands of new jobs across the country.

“On the one hand, you get good numbers like 60,000 [jobs] in one month but the labour force is rising faster because of immigration,” Tal said. “Unemployment is rising. Wages are not rising as quickly as suggested by the vacancy rate. So you have a mixed number: you can interpret it as good news [or] bad news, and therefore the Bank of Canada is asymmetrical on this one.

“The most important thing is inflation [to be] 2% by 2025, and the economic forecast. Those forces to me suggest that the Bank of Canada is preparing the ground for another move.”

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