"This is a significant difference in language, basically telling you that the Bank is willing to stop at this point if the data behaves"
The Bank of Canada’s “very encouraging” language in its latest policy rate announcement indicates that it could be ready to hit pause on its series of rate hikes, according to CIBC deputy chief economist Benjamin Tal (pictured top).
The prominent economist told Canadian Mortgage Professional that the central bank’s Wednesday statement, in which it said it “will be considering” whether the policy rate needs to rise further, was a departure from its hawkish tone of recent months when it consistently indicated further increases were on the way.
“This is a significant difference in language, basically telling you that the Bank is willing to stop at this point if the data behaves,” Tal said. “That’s a significant change, and that’s one thing.
“The other, however, is that it’s very likely that they will keep this kind of language until the spring – so maybe that will keep us guessing. They’re not closing the door for additional hiking, and this language gives them enough flexibility.”
The Bank raised its benchmark rate by a further 50 basis points on Wednesday, bringing it to 4.25% in a move that signalled the first time it has hit the 4% mark since 2008.
Tal said that the focus could now shift from what the next move will be to when the central bank is likely to cut rates for the first time since March 2020 – although he suggested that the market might be disappointed on that front.
“I think that the Bank of Canada is determined to make sure that they will not touch interest rates in terms of cutting them before inflation is totally dead,” he said.
“We went through the 1970s and the double-dip recession of the 1980s largely due to the fact that the monetary policy was eased prematurely. That’s a nightmare as far as they’re concerned, and they would like to avoid this kind of situation.”
It wouldn’t be unreasonable, then, for the Bank to keep its interest rates at current levels before cutting in early 2024, Tal said, despite bond yields having declined in recent weeks in the expectation of rates dropping in 2023.
How is the housing market influencing the Bank of Canada’s approach?
While the housing market has been a distant consideration for the Bank of Canada compared with inflation in its rate-hiking path of 2022, Tal suggested that it may now be factoring into its thinking – particularly with a rising number of mortgages now at or approaching their trigger rate, the point at which payments only cover interest and no longer whittle down remaining principal.
The central bank recently estimated that about half of variable mortgages with a fixed payment are at their trigger rate, and that a 50-basis-point increase in variable rates by mid-2023 would increase that percentage by 15% – meaning 17% of all mortgages would be at or approaching their trigger rate by that point.
“[For] mortgages that are in trigger-rate situations, the number is not insignificant and will continue to grow after today’s increase,” Tal said. “So I think that’s something that is starting to impact the psyche of the Bank of Canada in terms of, ‘OK, maybe we should stop now.’
“I think that rates are high enough to stop, to have a significant impact on mortgage default rates, the impact on the economy, and also increased mortgage payments. And that’s something that I think is impacting their decision. I’m not sure if it’s the number-one factor, probably not, but clearly more than before.”
How likely is a market crash?
Tal has remained steadfast in his belief throughout the housing market turmoil of 2022 that a correction is taking place rather than a crash – and the Bank’s latest rate announcement has done little to change that view.
“This is the first correction ever in the housing market that resale supply is not rising,” he said. “In fact, [it is] going down. And that’s, in many ways, protecting prices and limiting the damage in terms of the price.
“I think in 2023 we might see some increase in the supply – people will start listing because they will feel more comfortable about the market and we might see some forced sales due to the impact of the trigger rate and higher interest rates. Those forces will prevent any significant improvement in house prices in 2023 – [they] might actually put some additional pressure on it.”
The fact that the Bank appears to be at or near its endpoint on rate hikes will also likely inject some welcome certainty into Canada’s housing market, Tal suggested.
“When the fog clears and you know that interest rates are not rising anymore, that will provide the market with a bit of clarity,” he said, “and that’s what [it] needs at this point to function.”
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