The deputy chief economist wasn't surprised by the lack of movement on the Bank’s benchmark rate
Was the Bank of Canada’s decision not to hike its policy rate in the first announcement of this year a surprise? Not at all, according to Canadian Imperial Bank of Commerce (CIBC) deputy chief economist Benjamin Tal (pictured top), who said that the statement represented little more than a “huge PR exercise.”
Many economists had anticipated that the Bank would react to the threat posed by inflation, currently at a 30-year high in Canada, with a hike from the rock-bottom 0.25% that the benchmark rate has remained at throughout the COVID-19 pandemic.
However, speaking with Canadian Mortgage Professional, Tal said that it made little difference economically to wait until March to raise that rate, with the Bank’s decision to hold steady reflecting the ongoing complication of the Omicron wave.
“It’s nothing to do with economics. Whether or not they move in January or March – the debate is much ado about nothing, because economically speaking it doesn’t make much of a difference,” he said.
“Really, it’s a PR story. On the one hand, you have inflation, and you don’t want to be seen as being behind the curve, so you want to raise interest rates. At the same time, do you really want to raise interest rates in the middle of a pandemic?”
With the economy likely to lose 100,000 jobs in January, and as small businesses continue to feel the brunt of restrictions because of the pandemic, Tal said that the Bank had effectively signalled rate hikes were imminent – but opted against imposing them straight away.
“There are two opposing forces: one is that you want to maintain the credibility of the Bank of Canada,” he said. “At the same time, you don’t want to be seen as insensitive to the suffering of people during the Omicron wave. So, what do you do? You basically raise rates without raising rates.”
The economist noted that the Bank’s hawkish stance on interest rates (it acknowledged that they “needed to increase”) meant that hikes in March were all but inevitable – unless, that is, in the case of further negative developments on the COVID-19 front.
Raising rates in March would still allow the Bank to carry out four increases during 2022 and another two or three in 2023, peaking at around 2% from their current level of 0.25%.
The Bank’s tone in its latest announcement was cautiously optimistic on the Omicron variant, noting that while it remained a cause for concern, it was unlikely to wreak as much havoc as previous versions of COVID.
“The Omicron variant is weighing on activity in the first quarter,” it said. “While its economic impact will depend on how quickly this wave passes, it is expected to be less severe than previous waves.”
Still, the possibility of a protracted Omicron wave – or the emergence of another variant – stretching into the coming weeks and months was one that could present difficult choices on interest rates for the Bank, according to Tal.
That could see the inflation-versus-pandemic struggle intensify, he said, with the central bank likely to come under further pressure to make a choice between the economic impacts of COVID-19 and ballooning inflation.
“If the pandemic gets worse, it means that the supply chain issues will not ease; the opposite would be the case,” he said. “That will be a very significant dilemma for them. At this point, the main theme is that Omicron is short-lived, and by the second half of the year, we are going to be on fire when it comes to economic growth.”
Read more: Inflation hits 30-year high in Canada
On paper, the Bank’s decision not to increase its policy rate in the January announcement means that mortgage hunters will be able to avail of current bargain rates for at least a couple of months longer.
Could that have any material impact on the country’s housing market in the opening quarter of the year? Don’t count on it, said Tal: hiking rates in March rather than January isn’t likely to heat up housing demand by any strength.
“I think it’s not very significant, quite frankly,” he said. “The market is pricing in an increase, and it’s always in the five-year rate.
“If the bank rates went up today, then the prime rate would have gone up just basically a few weeks before [March]. So I don’t think it’s a very significant story.”
That said, the prospect of the Bank choosing to take bolder action than anticipated on interest rates – for instance, pencilling in a larger number of hikes in 2022 than currently anticipated – is one that could cause a blow to the market, Tal said.
“The focus when people talk to clients about interest rates is not whether they will be rising, but how quickly they will be rising,” he emphasized.
“If the Bank of Canada goes very quickly – say, six or seven times this year – that would be negative for the housing market. If they go four times this year, I think that’s something that the market can take.”