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Bank of Canada interest rate forecast report

Experts expect a 50 basis point increase in latest BoC overnight rate announcement

Finder Bank of Canada: Rate forecast report

Key findings

  • 100% — Of experts predict an increase to the BoC overnight rate on December 7
  • 80% — Of Finder’s experts predict the BoC will increase the overnight rate by 50 basis points (bps)
  • 60% – Slightly fewer believe this is what the Bank should do
  • 53% — More than half predict a rate hold by the Bank in January 2023
  • 50% — Of Finder’s experts forecast a return to target overnight inflation, between 1% to 3%, by the second half of 2023
  • 73% — Of experts anticipate widespread job losses in 2023 due to recessionary pressures
  • 71% — Expect the average rental price to increase in the first half of 2023
  • 85% — Nearly all experts anticipate that housing starts will continue to decrease throughout 2023
  • 92% – Forecast rising mortgage rates will continue to push home prices down

Canada interest rate forecast ahead of the December 7 decision

EXPERT COMMENTS HERE

The Bank of Canada (BoC) was relentless in its fight against inflation this year with six hikes over the last 12 months, for a total rate hike of 3.5%, since the historic low of .25% in January 2021. Based on the Bank’s actions over 2022 — and its ongoing commitment to tame inflation — all 15 of Finder’s experts anticipate another rate increase during the BoC’s announcement on December 7, 2022.

Recent rate hikes made headlines as a larger portion of Canadians reported increased stress due to rising prices of consumer goods, such as food and gas. Heavily indebted Canadians were most impacted as costs to service all forms of debt — from credit cards, to car loans to mortgages — rose significantly over the last 12 months.

Unfortunately, pressure on Canadian budgets doesn’t appear to be letting up, with most of Finder’s panel of economists and industry experts (80%) anticipating a 50 basis point (bp) increase at the December 7, 2022 rate announcement. Still, there is a silver lining. None of the Finder panel of experts expected a BoC rate increase greater than 50 bps. A minority of Finder experts (20%) predict a 25 bps at the Dec BoC announcement.

H3: Why a 50 bps rate hike is appropriate

The main reason most experts believe the Bank will hike rates by 0.50% one last time in 2022 is a need for Canada’s central bank to remain vigilant in the fight against inflation.

“The economy continues to push into excess demand with employment at a record high amid accelerating wage pressures and weak productivity,” explains Derek Holt, vice president and head of capital markets economics at Scotiabank”[As a result,] inflation risk remains high.”

Philip Cross, senior fellow at the Macdonald Laurier Institute, added that while “inflation may have peaked [in 2022] but [threatens] to stay elevated.”

Sebastien Lavoie, chief economist with Laurentian Bank Financial Group, agrees. He believes that because high inflation could become entrenched, the BoC needs to continue to put pressure on rampant spending.

“Uncertainty about the impact of past tightening…ultimately requires further hikes, particularly since demand has not fallen enough to cool inflation in a comfortable way for the BoC. Accordingly, a 25 bps hike in December does not appear enough in our view.”

However, 40% of Finder experts who believed the Bank should not raise rates in December or, at the very least, cap the rate hike at 25 bps cited a need for more caution due to the high probability of a recession, fears of widespread job loss and heavily indebted Canadians

Murshed Chowdhury, associate professor at the University of New Brunswick, highlights the dangers of rising debt: “Household indebtedness is increasing, and the Bank needs to take a cautious approach as the impact of the rising interest rate is heterogenous across households. Therefore, the [Bank] needs a good balance between over and under-tightening monetary policy.”

When will the Bank of Canada pivot?

During this rising rate environment, there’s been a widespread devaluation of assets, like stock portfolios and housing. At the same time, the rising cost of debt cut into household budgets.

Given the ongoing difficulties faced by many Canadians, more than half of Finder’s experts (53%) didn’t anticipate another rate hike at the January 2023 BoC announcement. In the last 12 months, this is the first time economists and experts did not anticipate a change in the central Bank’s overnight rate.

"Given how much Canadians have been through already in 2022, the Bank might lay off a little and only increase the overnight rate by 25 basis points — to send a mild signal that its work is not done and accompany it with a message that more hikes will come in 2023," explains Senior Economics Lecturer at Concordia University, Moshe Lander.

Carl Gomez, chief economist with CoStar Canada, doesn't believe the Bank will continue its rate hikes into 2023. "The Bank is likely to tolerate one more big rate increase, to maintain its credibility on inflation, but with the full impact of past rate hikes not fully felt, and the potential for the economy to slip into a moderate but increasingly deeper recession, the Bank is likely very close to pivoting and holding rates steady."

Canada's interest rate forecast: The Economic Outlook

To assess the impact of Canada's interest rate forecast, Finder's expert panel was asked to review the direction of five significant economic indicators over the next six months.

Not surprisingly, 100% anticipated housing price decreases heading into 2023, and another 85% predicted higher unemployment numbers, with almost two-thirds (60%) expecting this to translate into slow or stagnant wage growth. Almost all economists ( 93%) expected a continued rise in the cost of living over the next six months, and more than half (60%) see household debt rising.

Recession risk rises as inflation slowly recedes

During this year of rate hikes and quantitative tightening, the Bank of Canada reinforced that their aim is to return inflation to the desired 1% to 3% range.

Based on the decisions made over the last year by the BoC, half of Finder's expert panel believed the Bank would not reach its goal until 2024 or beyond.

The other half of the expert panel believed the Bank's success would happen sooner — either sometime in 2023 or at the beginning of 2024.

Nikola Gradojevic, professor of economics at the University of Guelph, is convinced the BoC will not achieve its goal until 2024 and beyond. "Growth in Canada is mostly demand-side driven. The problem is that Canada's government is still fueling demand with various benefits that drive up inflation. Thanksgiving and Christmas seasonal shopping effects are adding more fuel to the fire. Hence, the Bank of Canada will be forced to try to bring inflation down with higher interest rates."

Widespread unemployment incoming?

With an impending recession all but inevitable, experts are beginning to watch unemployment rates. Nearly three-quarters (xx%) of Finder's experts predict widespread unemployment in 2023.

"Tighter monetary policy will slow growth," explains Angelo Melino, an economics professor at the University of Toronto "I expect job openings to contract sharply, with modest but broad-based declines in employment in 2023."
Tony Stillo, director of Canada Economics, a firm that produces the Oxford Economics' forecast which tracks unemployment and recession trends, believes Canada could start entering a recession before the year ends. Through their analysis, Canada Economics is forecasting a 1% decline in total employment for the upcoming recession. This is less than the average 1.6% drop of past recessions.

"In a post-pandemic environment of elevated job vacancies and widespread labour shortages, we think firms will decide to hold onto hard-to-find workers, limiting the decline in employment relative to past downturns…Accordingly, while we expect the unemployment rate to rise in the coming quarters, we don't foresee as high of a peak as in past downturns…In our forecast, the unemployment rate is set to rise 3.1% over a longer period of seven quarters, peaking at 8.2% by Q1 2024."

Taylor Schleich, rates strategist with National Bank of Canada, believes there will be some job losses, "but not widespread. Hiring freezes may be more likely. Given labour scarcity over past years, there may be reluctance to shed jobs outright."

Canada's interest rate forecast: The Housing Market Impact

In November, the Canadian Real Estate Association (CREA) reported that home sales were up slightly (1.3% month-over-month), after more than half a year of declines.

Despite this small uptick in sales activity, Finder's expert panel still considers Canada's real estate market to be in a downturn going into 2023, and into 2024.

Regarding Canada's real estate market, Finder's panel of experts believed the following:
71% — Expect the average rental price to increase in the first half of 2023
85% — Anticipate housing starts will continue to decrease throughout 2023
62% — Believe decreasing housing starts will have no direct impact on home prices in 2023
64% — Anticipate t interest rates will continue rising in 2023
92% — Forecast rising mortgage rates will continue to push home prices down

"Year-over-year housing price declines were almost 10% in October 2022 and a rebound doesn't look promising for 2023," explains Romana King, senior finance editor with Finder. "The Bank of Canada still has more work to do, when it comes to curbing inflation, and higher borrowing costs combined with higher prices for consumer goods and services means persistent affordability problems for potential home buyers. This doesn't mean homeowners should brace for a housing market crash. Despite the increased cost of mortgage debt, a persistent lack of housing supply means price declines will be tempered by a steady percentage of Canadians still looking to buy a home."

Finder's Expert Panel

Associate Professor, University of New Brunswick - Murshed Chowdhury https://sites.google.com/site/murshedecon/

Director of Canada Economics, Oxford Economics - Tony Stillo https://blog.oxfordeconomics.com/content/author/tony-stillo

Chief Economist, Central 1 - Bryan Yu
https://www.central1.com/people/bryan-yu/

Professor, University of Toronto - Angelo Melino
https://www.economics.utoronto.ca/index.php/index/person/person/faculty/48

President, Will Dunning Inc. - Will Dunning
https://www.wdunning.com/

Professor of Finance, University of Guelph - Nikola Gradojevic
https://www.uoguelph.ca/lang/people/nikola-gradojevic

Vice President and Head of Capital Markets Economics, Scotiabank - Derek Holt
https://www.scotiabank.com/ca/en/about/economics/our-economists/derek-holt.html

Chief Economist and Head of Market Analytics, CoStar Canada - Carl Gomez
https://www.costar.com/author/9ec0fc3886f2f9ae3581719104d8e4b9/carl-gomez

Chief Economist, Laurentian Bank Financial Group - Sebastien Lavoie
https://www.vmbl.ca/portal/en/equipe

Canadian Rates and Macro Strategist, BMO - Benjamin Reitzes
https://capitalmarkets.bmo.com/en/our-bankers/benjamin-reitzes/

Senior Fellow, Macdonald-Laurier Institute - Philip Cross

Philip Cross

Chief Economist, Dominion Lending Centres - Sherry S Cooper

Home

Senior Lecturer in Economics, Concordia University - Moshe Lander
https://www.concordia.ca/artsci/economics/faculty.html.html?fpid=moshe-lander

Rates Strategist, National Bank of Canada - Taylor Schleich
https://www.linkedin.com/in/taylor-schleich-a15752112/

McCulloch Professor of Economics, Dalhousie University - Lars Osberg
https://www.dal.ca/faculty/science/economics/faculty-staff/our-faculty/professors/lars-osberg.html

Survey Methodology

The Finder: Bank of Canada Interest Rate Forecast report surveyed 15 Canadian Economists and industry experts between November 25 and December 1, 2022. Respondents were asked about the upcoming overnight rate announcement by the Bank of Canada, scheduled for December 7, 2022.
The online survey allows panellists to answer or skip questions. As a result, the number of responses received may vary by question.

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