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Bank of Canada interest rate forecast report

Most economists predict 4 rate rises this year, including the June 1 increase

Finder BoC Report: Canada’s largest overnight rate report

Key findings

  • All experts (100%) forecasted the overnight rate to increase June 1
  • Majority of economists are predicting 3 more rate rises for 2022
  • Most panellists (88%) believe the rate should increase June 1
  • Economists are divided on recession, 50% say they don’t see one in next 1–2 years
  • A quarter of economists (25%) say Canadian housing prices are already in a correction
  • The majority of experts see wage growth (94%) and employment numbers (67%) increasing but most (94%) also see cost of living increasing over the next 6 months
  • Approximately 4 in 10 panellists (41%) think the Bank should be less aggressive with rate raising this year so as to not endanger over-leveraged Canadian homeowners

Expert forecasts ahead of the June 1 decision

The June 1 decision

The Bank of Canada, like many central banks around the world, has been raising the interest rates at each meeting since March this year, mainly in an attempt to tame runaway inflation.

Since we are now in what seems like a cycle of rate raises, at least in the short term, there is an increased focus on how many times the rate will be raised this year.

The current consensus is that at most overnight rate meetings this year there will be increases, with the majority of economists predicting the overnight rate will be raised 3 more times this year, so at least a total of 4 when this June rate raise is included.

As of this report, more than three-quarters are predicting another 2 rate raises to follow, in July (78%) and September (61%).

When we asked our experts what the Bank of Canada should be doing to the overnight rate on June 1, the majority of experts (88%) said the rate should indeed be increased.

Derek Holt VP & head of capital markets economics at Scotiabank stated, “Canada should already be at a neutral interest rate given how high the inflation rate is running and given the characteristics of the economy.”
Like Holt, Charles St.Arnaud, chief economist at Alberta Central, is even more bullish on rate raises to fight inflation, commenting, “There is a need to bring the policy rate rapidly to neutral and maybe even above to lower inflation.”

While many experts assume it is a given the Bank of Canada will increase the rate by another 50bps on June 1, a few experts believe the Bank should be more cautious. Tony Stillo, director of Canada economics for Oxford Economics, states:

“We believe the Bank of Canada should increase the overnight rate in June by only 25bps and continue on a cautious path, pausing as necessary to assess the outlook, especially given concerns about Canada’s underlying household debt and housing sector vulnerabilities.”

Lars Osberg, economics professor at Dalhousie University is one of the minority who believe the Bank should instead hold the rate in June due to the fact, ​​”Interest rate hikes cannot impact actual inflationary pressures quickly – the larger risk is over-reaction to transitory price shocks.”

Should the BoC consider asset inflation in its policy?

The alarm bells warning of an economic downturn are ringing louder, with major stock market indices either flirting with bear market territory, like the S&P 500, or fully in bear market territory, like the Nasdaq. Not to mention the recent losses felt by those invested in cryptocurrency or the start of a slowdown in housing demand.

In an environment where the BoC is raising rates aggressively to tame real inflation, we asked our experts if they think the Bank should be more concerned about asset inflation.

Turns out the majority of the panellists said no (56%), while about one-third (33%) said yes and 11% were unsure.
Of those who said the Bank of Canada should more closely consider asset prices when deciding its policies was Philip Cross, senior fellow at MacDonald Laurier Institute.

Cross commented, “It was a mistake to de-emphasize asset price inflation in the 1990s. Time to correct that, among many, mistakes.”

Angelo Melino, professor at the University of Toronto, was among the experts who said no, believing while, “Asset inflation provides a useful information signal to the Bank, its mandate is to control CPI inflation.”

Atif Kubursi, president and emeritus professor at Econometric Research and McMaster University, is in the minority of those who were unsure, commenting:

“We had asset inflation in housing prices and stocks valuation. These have started to correct. The real problem is dealing with supply shortages of commodities and services. My worry is about the wealth effect as this may dampen demand in excess of what the Bank may target.”

Is Canada headed for recession?

Market weakness, runaway inflation and lower than expected GDP have driven recent concerns about a bubble bursting across almost every asset class, potentially leading us into a global recession.

Interestingly, when we asked economists about the risk of a recession they were completely divided, with 50% seeing it happening in the next year and a half, and the other half (50%) saying they don’t see a recession happening at all within the next 2 years.

In fact, the most popular timeframe for those who believed a recession is coming is both the second half of 2022 (17%) and the second half of 2023 (17%), with just 11% saying they see a deeper downturn hitting in the first half of 2023 and just 1 expert (6%) seeing a recession hitting in the first half of 2024.

Avery Shenfeld, chief economist for CIBC, is one of the experts who doesn’t see a recession happening, stating, “Odds…have risen but are not yet above 50%, as there remains time to slow growth and get inflation under control without an outright recession.”

Tony Stillo points to the risks of recession but states the odds are still weighted toward no recession in the next 2 years.

“Our baseline forecast expects the economy will avoid a recession over the next 2 years. GDP growth is forecast to slow sharply from 4.1% in 2022 to 2.2% in 2023 and further to 1.8% in 2024. However, the Canadian economy is facing several headwinds that risk pushing the economy into recession. These include aggressive monetary policy tightening by the Bank of Canada, elevated inflation that is weighing on real disposable income, heightened uncertainty due to the war in Ukraine, and our forecast for a 24% decline in house prices. We currently put the odds of a recession over the next 12 months at 35%.”

In the other half of experts who see an imminent recession, Carl Gomez, chief economist and head of market analytics for CoStar Group, believes one is coming in the second half of this year, stating, “The leading indicators are pointing to a 30–40% chance of recession in the next 6 months. A policy error with regards to increasing interest rates could possibly tip the economy into recession by then.”

Murshed Chowdhury, associate professor at the University of New Brunswick, also believes that a recession is in the cards, just not for another year or so.

“It’s becoming a self-fulfilling prophecy. Many financial agencies started raising flags regarding possible economic downturns. It also depends on what happens to the real estate in the near future, how the supply-side issues are being managed and what would happen to the Russia-Ukraine crisis.”

Housing outlook

After years of the housing market running hot and Canadian housing prices reaching highs that put the dream of home ownership out of reach for so many, it finally looks like relief could be on the way. Could a cool down, or more precisely a correction, be on the horizon?

We asked our experts when the impact of rate hikes would result in the Canadian housing market being officially in correction territory (a correction defined as a 20% reduction in prices from all-time highs).

Turns out one-quarter of our experts (25%) think this correction is already underway. 1 expert (6%) sees it happening this summer in Q3, 2 (13%) more see the correction coming in Q4 at the end of this year. 1 more (6%) forecasts this correction happening in winter, (Q1 2023), 1 more (6%) in spring of next year (Q2) and 1 more (6%) says the correction won’t come until 2024.

Opinions were spread across the board for when this housing market correction will hit in the next 1 to 2 years for those who believed there would be one, but surprisingly the most popular response was “I don’t see a correction coming in the next 2 years” – with 38% saying the Canadian housing market won’t experience a correction.

Tony Stillo believes this correction will take place in Q3 of this year, explaining the current real estate market and dangers with data from Oxford Economics below:

“We believe a 24% house price correction will get underway by autumn, triggered by record unaffordability, rising interest rates and new government policies designed to curb speculators, tax vacant housing and bans for foreign buyers. However, the housing market may have already reached a breaking point, with home sales down sharply over the past few months and average home prices already down 6.3% from their February peak. Canada entered the pandemic with historically elevated household debt, and that vulnerability has only been exacerbated by the $300 billion rise in mortgage debt during the pandemic.”

Bryan Yu, chief economist for Central 1, doesn’t see a full 20% correction coming in the next 2 years, rather he “anticipates a drop of about 10% by end of 2022 and flat conditions thereafter”.

Should the Bank temper rate hikes to protect heavily indebted borrowers?

BoC deputy governor Tony Gravelle recently spoke to economists in Quebec and stated, “[A factor that] might lead us to pause [rate hikes] is that many households have taken on more debt to get into the housing market.”
Based on these recent remarks by Gravelle, we asked our panel if they believed the Bank should be less aggressive with rate increases this year so as to not endanger overleveraged Canadian homeowners.

Of those who don’t believe the Bank of Canada should temper their increase schedule is Sherry Cooper, chief economist for Dominion Lending Centres, who states, “It is paramount that the Bank gets interest rates high enough to break the back of inflation.”

However, there are experts who believe the Bank should consider its aggressive rate hike schedule and the effect it will have on Canadians.

Tony Stillo and Oxford Economics believe, “The Bank of Canada should be cautious when raising interest rates to avoid aggravating Canada’s underlying household debt and housing market vulnerabilities.”

Real estate expert Will Dunning says the Bank should be cautious but for a slightly different reason, explaining:

“At current interest rates (with borrowers able to renew with a variable rate below 3%), the risk isn’t so much about impacts on borrowers’ costs but on their employment situations. The risk is that a sharp downturn in transactions leads to a substantial price erosion, then results in a downward interaction between the economy and the housing market.”

Economic outlook

We asked the panel about where they see the direction of 5 major economic markers over the next 6 months.

The majority of experts see wage growth (94%) and employment numbers (67%) increasing, which is an overall positive for workers in a highly inflationary environment, but clearly job numbers and pay increases are not enough to put a stop to what 94% of our experts see as increases to cost of living over the next 6 months.

Another indicator the majority of our panellists (82%) see rising is household debt. No surprise with the runaway inflation we have seen in the first half of 2022.

Despite a recently cooling housing market, just 35% see housing affordability increasing.

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