How soon are interest rates likely to stabilise?

Avison Young outlines factors that could affect near-future rate movements

How soon are interest rates likely to stabilise?

Canadian interest rates are likely to see a measure of stability next year should inflation begin to move “sustainably downwards” during the early months of 2023, according to Avison Young chief economist Nick Axford.

Axford said that the central bank’s latest rate announcement, which saw the benchmark rate reach 4.25%, was “generally above the consensus view that they would opt for a smaller 25bps hike given recent signs that domestic demand, earnings growth, and core inflation are starting to ease.”

The factor that most likely influenced the December 7 announcement was the stronger-than-anticipated Q3 GDP data.

“This probably tipped the balance to go for a larger increase in policy rates in what must have been a tight decision,” Axford said. “The accompanying forward guidance suggests that rates may well now have peaked, with the bank moderating its previous comments that additional hikes would be needed in favour of now ‘considering whether the policy interest rate needs to rise further.’”

Is another hike still possible?

However, Axford is not yet ruling out another rate increase.

“We may yet see another 25bp hike in January, depending on what the data show,” he said, while stressing that “it seems clear that we are at least close to a peak in the current rate-tightening cycle in Canada.”

Axford added that the latest increase “coupled with the quantitative tightening that is also underway represents a significant tightening of financial conditions, which will restrict the flow of credit in the economy. This will act as a further constraint on the commercial real estate sector and housing market, impacting both pricing and transaction volumes.”