The likely terminal rate seems clear – although it may take more than one further move to reach it
The Bank of Canada’s language in its latest interest rate announcement suggested that its next hike may not be the last in its current cycle – although its likely terminal rate will remain 4.25%, according to BMO chief economist Doug Porter.
The central bank referred to “future rate increases” in a statement accompanying its rate decision on October 26, with use of the plural possibly indicating a 25-basis-point December hike followed by a further jump by the same amount in January, Porter told Canadian Mortgage Professional.
A 0.5% increase to the Bank’s policy rate was a slightly smaller step than anticipated by markets, which had expected a three-quarter-point hike. Still, while BMO has slightly adjusted its expectations for the central bank’s path to the end of its rate-hiking cycle, that makes little difference in the wider scheme of things, according to Porter.
“We’re still quite comfortable with that 4.25% endpoint… The timing changes slightly, but I think the bigger picture hasn’t really changed,” he said.
After reaching that point, either through two quarter-point hikes or a 50-basis-point jump in December, the Bank looks likely to hit pause on its rate-hiking cycle as it assesses how those increases are impacting Canada’s economy and inflation.
Read more: BoC nearing end of rate hikes, but not done yet: CIBC's Tal
Whatever the case, it has indicated that the end of rate hikes for now is approaching, meaning that despite another big increase there’s some room for optimism where the housing market is concerned.
“You can look at it as glass half full, or glass half empty,” Porter said. “From a housing market perspective, definitely the glass half empty [outlook] is, let’s face it, it’s another half-point increase. That’s a very serious step. And [Tiff] Macklem warned that they’re not done yet.
“The glass half full [view] would be he also signalled that the end may almost be in sight here, and they went by less than what the market was expecting.”
The news was accompanied by a rally in Canadian bond yields, which fell in recent days in a development that will provide some relief to those seeking to borrow or renew on a fixed mortgage rate.
“It may seem counterintuitive that in a week when the Bank of Canada hiked by a half percentage point, this actually may be mildly good news for the medium-term outlook for the housing market,” Porter said.
Unsurprisingly, inflation featured heavily in the Bank’s latest statement, which highlighted the fact that price pressures are still “broadly based” as two-thirds of consumer price index (CPI) components have spiked by over 5% during the past year.
With inflation expectations in the near term remaining high, there’s an increased risk that elevated inflation becomes entrenched, the central bank said, reinforced by underwhelming September figures that saw annual price growth decrease by less than had been anticipated by economists.
Read more: Bank of Canada makes another big rate hike
Pervasive inflation could compel the Bank to hike beyond the likely 4.25% terminal point in early 2023 – although that may be a necessary measure to bring it down decisively, according to Porter.
“They might be overshooting in the sense that it will probably lead to an economic downturn, but perhaps that’s what it’s going to take to bring inflation out of the system,” he said.
“I would not call it overshooting unless and until they actually push inflation down more than they would like to. Frankly, I don’t think that’s that big of a risk yet. I actually think rates will have to go a fair bit higher to get us to a place where inflation actually surprises on the low side.”
Nonetheless, the less aggressive language used by the central bank in its latest statement indicates that it has more flexibility on rate hikes than in previous months, Porter added.
“With the overnight rate now almost 4%, they definitely can slow down the pace of rate hikes, and perhaps even dramatically so,” he said. “Rates are well above neutral, [and] they’re well into the restrictive zone. Inflation has backed off a little bit, at least for now.
“So I think the pressure on the Bank is a little less intense and yes, they do have some flexibility. If they chose to pause right now, I don’t think that would necessarily be the worst decision. Maybe that actually would make sense to see how the economy can handle the amount of tightening they’ve already done.”
The Bank’s desire to continue showing that it means business on rate hikes, however, is likely spurring its continued action.
“I think the only reason why they wouldn’t stand aside for a while is they also don’t want to send the signal that they’re done, that they won’t do any more,” Porter said.