CIBC: Economy, rate hikes will have significant cooling impact on market activity

The likely trajectory of the central bank’s increases to its overnight rate defies all initial expectations

CIBC: Economy, rate hikes will have significant cooling impact on market activity

The prevailing macroeconomic environment and the pace of the central bank’s interest rate increases will be the major factors in the likely slowdown of the Canadian housing market over the next few months, according to Avery Shenfeld, chief economist at CIBC World Markets.

“We continue to expect that taking overnight rates from near-zero into the mid-2% range will provide a good deal of dampening impact, particularly when combined with quantitative tightening and the end of massive fiscal stimulus,” Shenfeld said.

CIBC Economics is now projecting that the Bank of Canada will be raising its overnight rate to 2.5%, a quarter point higher than its initial predictions.

Both the BoC and the US Federal Reserve “could easily do another 100 basis points in total over their next two meetings,” Shenfeld added.

Read more: Bank of Canada: Are further oversized hikes on the way?

Barring major shifts in the global economic situation, the large increases seem all but inevitable at this point, Shenfeld warned.

“We’re going to need some surprises on growth and inflation going the other way, relative to market expectations, in order to stand in the way of that trend, and it may be several months before those are in evidence,” he said. “The risk for 2023 economic activity is that such evidence comes too late to stay in the central bankers’ hands, and leaves us facing a recession next year.

“It’s fair to say that after the pleasant surprises we’ve seen on growth in recent quarters, there are emerging risks of unpleasant surprises for 2023.”