Could one more supersized increase conclude the central bank's rising-rate trajectory?
The Bank of Canada’s intention to “frontload” its path to higher rates means its policy rate could peak as early as September, according to a prominent CIBC economist.
The banking giant’s executive director and senior economist Karyne Charbonneau (pictured) told Canadian Mortgage Professional that a further oversized hike in the Bank’s next rate announcement, scheduled for September 07, could bring rates to a level they may not go beyond.
“We [CIBC] think the rates will peak at 3.25%, probably. We don’t think there’s space for this type of hike [one percentage point] anymore,” she said. “So probably a 0.75%, maybe in September, and then take a break. That’s the CIBC view at this point.
“We think that by then, the economy will be slowing significantly on these higher interest rates and still-high inflation.”
The Bank caught many analysts off guard with that full-percentage-point hike, belying expectations among market observers and economists that a 75-basis-point jump was in the offing for its July 13 announcement.
Charbonneau said that while the latest increase had come as something of a surprise, in practice the move would have a similar impact to the previously expected three-quarter-point hike.
“I think it’s not completely shocking to be honest, but it’s not what we had forecasted,” she said. “I don’t think there’s a big difference – especially since they’re talking about frontloading.
“I’m not sure it changes the finish line very much. I think they’re trying to get there faster, and the messaging in the statement was very clear. It’s also very clear why they did that: because they want to avoid inflation expectations de-anchoring.”
Canada’s housing market has already cooled noticeably under the impact of the central bank’s previous rate hikes this year, with the July increase marking its single biggest move on rates in 2022 (and largest since 1998).
The Bank has now increased its benchmark rate four times this year: first by a quarter point in March, then in two half-basis-point hikes before the latest move, which brings that trendsetting rate up to 2.5%.
That said, a housing market meltdown in light of the latest Bank move is unlikely, according to Charbonneau, particularly since the Bank’s end goal remains largely the same – although it seems to be determined to get there quicker.
“I don’t think it’s a material change [for the housing market] because of this frontloading. I think we’re just getting to pretty much the same point,” she said. “We anticipated [rates to peak at] 3%, now we’re thinking 3.25%. That’s not a huge difference.
“I think the slowdown is already well underway in the housing market. I don’t think it’ll change the path that we’re already on.”
The Bank’s statement made it clear that targeting inflation, which recently hit a 39-year high in Canada, remains its number one priority. It’s likely to linger around 8% in the coming months, the central bank indicated, as domestic price pressures continue to escalate amid other factors including the war in Ukraine and supply chain disruptions.
The biggest threat facing the Bank at present on that front is the risk of inflation expectations that start to run away, Charbonneau said, because that could compel it to hike rates even further than it currently intends.
Factors outside the Bank’s control that contribute to higher inflation – such as energy prices and geopolitical strife – remain a concern, with Governor Tiff Macklem emphasizing in remarks on Wednesday that the path to a desired soft landing for the economy has “narrowed.”
Still, Charbonneau said rate increases should be enough to tackle the inflation crisis, and that CIBC believed inflation could come down more rapidly than the central bank is forecasting.
The Bank said on Wednesday that inflation would start to come down later this year, declining by the end of 2023 to about 3% and returning to its target of 2% by the end of 2024.
“We think it’ll come down a bit faster than what the Bank has right now,” Charbonneau said. “I think now they have it very persistent – but certainly it could all come down quite rapidly. It’s very hard to predict, but it could, and I think everyone would be happy about that.”