Dovish statement is 'basically suggesting that the Bank is done'
A “relatively dovish” statement by the Bank of Canada yesterday (December 6) suggested that the central bank’s rate-hiking path is at an end, according to CIBC deputy chief economist Benjamin Tal (pictured top).
The Bank left its policy rate unchanged for a third consecutive decision, with few surprised by a statement that arrived amid cooling inflation, rising unemployment and an expected economic contraction.
Once again, the Bank reiterated its willingness to raise its benchmark rate if required to continue bringing inflation lower – but that’s mainly an effort to dampen consumer expectations and keep the prospect of a rapid economic rebound in check, according to Tal.
“They have to keep mentioning that they will toy with the idea of raising again,” he told Canadian Mortgage Professional. “Otherwise, the market will react too aggressively, and they don’t want that. But overall, [the announcement was] not a big surprise whatsoever, and a relatively dovish statement – basically suggesting that the Bank is done.”
The central bank said it was “still concerned” about risks to the inflation outlook, a comment Tal said was designed to dispel the notion that its work on bringing down the consumer price index (CPI) was already done.
“I think the last thing they want is the long end of the 10-year rate, the five-year rate, to go down dramatically,” he said. “If they basically declare victory, you will see a situation in which the long end of the curve will go down [significantly], and that’s something that will sabotage what they’re trying to do. So they must keep us guessing.”
What’s the economic outlook after the latest Bank of Canada decision?
The Bank’s decision to leave rates unchanged in three successive announcements – and Governor Tiff Macklem’s unexpectedly dovish remarks on interest rates in recent weeks – have ramped up speculation about when it might be prepared to begin bringing its policy rate back down again.
Tal said it’s unlikely to touch rates until May or June, after which it will start cutting – with that trendsetting rate potentially set to fall by around 150 points by the end of the year.
Still, things are likely to remain challenging on the housing and mortgage fronts for the coming months, he added, with little prospect of an immediate upswing despite the Bank’s decision to pause.
“I think that the next few months will be difficult,” he said. “I think we’ll see more supply coming. We’ll see more new listings coming. Clearly, sales are down dramatically – so we’re entering a situation in which we are in a buyers’ market with no buyers, if you wish. The way I look at the situation: It will take a few more months before we start to stabilize.”
Canada’s housing market is “vulnerable” and facing a significant test, according to Tal – perhaps its most significant since the 1991 recession, which saw GDP tumble by 3.4% from peak to trough over eight quarters.
“Now, the current situation is not even close to the 1991 situation, but clearly it is a test,” he said. “And I think that with supply rising in the resale market and sales down, there will be more downward pressure on prices, especially in the condo space where we see supply rising of existing units.”
With interest rates having spiked over the past 20 months, scores of Canadian borrowers are facing much higher costs at renewal than the contract rate they originally took out.
That’s a reality that puts an even greater onus on the central bank to start bringing rates down next year, Tal said.
“If you’re renewing your mortgage now, an average extra payment is about 20%, 22%, so clearly it’s already starting,” he said. “I think that if the Bank does not cut during the course of 2024, the damage would be much more significant. We’d see delinquency rates rising fast.
“Now, there will be a shock, but I think that [with] the Bank of Canada cutting in 2024 and continuing in 2025, the shock would be manageable.”
2024 set to see muted economy amid continuing high rates
The gloomy outlook for the economy is expected to stretch into 2024 with a ”semi-recessionary” pace likely to prevail in the coming quarters, although there’s room for optimism beyond that.
“I don’t see any change – consumer spending is down, investment is down. The housing market is in recessionary territory, [and] per capita GDP is already down,” Tal said. ”I don't see anything change anytime soon - but I think that the second half of the year will be much better."
Another sign that things are progressing in the right direction for the Bank of Canada: the labour market, squeezed extremely tight for much of this year, is seeing a return to some degree of normality.
“If you look at the unemployment rate, it’s basically almost back to where it was - if you look at vacancy rates, back to the 2008 level,” Tal said. “So clearly, the labour market is normalizing – and that’s a good thing.”
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