Finder BoC Report: Canada’s Largest Overnight Rate Report

Expert forecasts ahead of the April decision

Key findings

• Every single economist believes the Bank of Canada will hold the rate on April 21
• A majority of economists (88%) believe the rate will hold for two years or less
• More than half of panellists (63%) believe the Bank is taking on political or economic risk by owning such a large portion of federal government bonds
• Housing forecasted to increase an average of 5% in 6 months
• About one-third of the experts (29%) agree Canadian real estate is a speculative bubble that will lead to a recession if or when it pops

Expert forecasts ahead of the April decision

• Sebastien Lavoie
• Moshe Lander
• Lars Osberg
• Tony Stillo
• Murshed Chowdhury

Sebastien Lavoie

Chief economist, Laurentian Bank

Hold

“The exit strategy, although not pre-ordained, will logically begin with the tapering of QE. More precisely, the improving economic momentum and encouraging outlook justifies monetary easing, but less than before.”

Moshe Lander

Professor of economics, Concordia University

Hold

“The Bank of Canada has room to push below its perceived lower effective bound. The economic impact of the move is likely to be minimal, but the signal that it sends to the markets is an important one, specifically, that the Bank is committed to any means necessary to keep the economy afloat during the third, and possible fourth, wave.”

Lars Osberg

Professor of economics, Dalhousie University

Hold

“[There is] too much uncertainty about the strength of the recovery to raise rates earlier [than the second half of 2022].”

Tony Stillo

Director of economics for Canada, Oxford Economics

Hold

“We expect the Bank of Canada will not lift the policy rate despite a temporary rise in inflation this spring and a stronger than expected economy in Q1. Still, prospects for the economic recovery in Q2 hang in the balance of a race between vaccine distribution and the rapid spread of more transmittable virus variants.”

Murshed Chowdhury

Associate professor, University of New Brunswick

Hold

“There is clear forward guidance from the Bank to hold the interest rate for a while to minimize the uncertainty of stakeholders. Despite the recovery, the economy is still not in a position to raise the interest rate. Moreover, the race between vaccine and virus makes economic recovery unsustainable for the short term.”

• Derek Holt
• Philip Cross
• Carl Gomez
• Craig Alexander
• Benjamin Tal
• Stephen Brown

Derek Holt

Vice president and head of capital markets economics, Scotiabank

Hold

“While inching toward policy exits, emphasis will first be placed upon reducing bond purchases.”

Philip Cross

Senior fellow, Macdonald-Laurier Institute

Hold

“[The] pandemic is still raging; now is not the time to change.”

Carl Gomez

Chief economist and head of market analytics for CoStar Group

Hold

“A protracted economic recovery for Canada is not likely until at least late 2022. When economic slack begins to be reduced over 2023, the BoC will likely be more inclined to begin normalizing rates during the second half of that year.”

Craig Alexander

Chief economist and executive advisor, Deloitte

Hold

“Yes, the Bank is taking on political risk [by owning such a large percentage of government bonds].”

Benjamin Tal

Managing director, CIBC

Hold

“The economy is not ready for higher rates.”

Stephen Brown

Senior Canada economist, Capital Economics

Hold

“We think the Bank will wait longer than in the past before it raises interest rates, until it sees conclusive evidence that there is a risk of inflation moving above 2% on a sustained basis.”

• Sherry Cooper
• Angelo Melino
• Atif Kubursi
• Sri Thanabalasingam
• Bryan Yu
• Brett House

Sherry Cooper

Chief economist, Dominion Lending Centres

Hold

“The recent lockdown is going to slow economic activity. The vaccine distribution debacle makes it worse.”

Angelo Melino

Professor, University of Toronto

Hold

“The economy still has a long way to go before returning to prepandemic levels of output and employment.”

Atif Kubursi

President, Econometric Research Ltd

Hold

“The economy is slowly recovering and the BOC is reluctant to interfere in any way that will complicate or retard this recovery as long as inflation rates are within the target range.”

Sri Thanabalasingam

Senior economist, TD Bank Group

Hold

“Canada is not out of the woods yet. The third wave of the pandemic is sweeping across the country, and as such, the Bank of Canada will opt to hold interest rates at 0.25% to continue to provide extraordinary monetary policy support to the economy.”

Bryan Yu

Chief economist, Central 1

Hold

“Canada’s economy continues to recover from the pandemic downturn but has not fully recuperated despite strong growth in recent quarters. Inflation remains low, and uncertainties related to a third wave on the economy remain significant. The Bank has been consistent in its plans to hold its policy rate at current levels until inflation returns sustainably to target which is unlikely until late 2022.”

Brett House

Deputy chief economist, Scotiabank

Hold

“The experience in other countries with QE in the wake of the 2008 financial crisis implies that holding and gradually unwinding asset holdings is entirely feasible.”

• Eldar Sehic
• Avery Shenfeld
• Josh Nye
• Roelof van Dijk

Eldar Sehic

Professor of economics, The University of Victoria

Hold

“The Bank of Canada has reiterated its accommodative stance and its intentions of maintaining the overnight rate. It will not alter its course any time soon, given the low inflation and the shaky economic recovery. The economy remains vulnerable and its channels of growth are struggling to effectively stimulate output and employment.”

Avery Shenfeld

Managing director and chief economist, CIBC

Hold

“We expect the output gap to be closed by the final quarter of 2022. At that point, near-zero interest rates will no longer be appropriate or required to support growth.”

Josh Nye

Senior economist, RBC

Hold

“We expect Canada’s economic recovery will pick up steam over the second half of the year as vaccinations become more widespread and the economy can be re-opened on a sustained basis. We assume the economy will return to full capacity by mid-2022, setting up for the first-rate hike in Q3/22.”

Roelof van Dijk

Senior director, national research & analytics, Canada, Colliers International

Hold

“Despite runaway housing prices and rising inflation (although this is only expected to be temporary), the unequal and fragile economic recovery, especially considering renewed lockdowns, limits the BoC’s ability to raise rates. As they have stated, we likely need to wait for inflation to be more permanent before any potential rate hikes.”

It has now been more than a year since the Bank of Canada declared that .25% would remain the effective lower bound, but earlier in the year, there was some speculation that rates could see another “microcut” and more recently that they may rise sooner than expected – leading many experts to question if regular rate holds will remain a certainty for the foreseeable future.

Still, when we asked our panel of economists if the Bank of Canada would hold the rate, every single one of Finder’s 24 panellists agreed it would still hold on April 21.

Murshed Chowdhury, associate professor at the University of New Brunswick sums up the Bank’s current stance.

“There is clear forward guidance from the Bank to hold the interest rate for a while to minimize the uncertainty of stakeholders. Despite the recovery, the economy is still not in a position to raise the interest rate. Moreover, the race between vaccine and virus makes economic recovery unsustainable for the short term.”

Sri Thanabalasingam, senior economist at TD Bank agrees with Chowdhury saying, “Canada is not out of the woods yet. The third wave of the pandemic is sweeping across the country, and as such, the Bank of Canada will opt to hold interest rates at 0.25% to continue to provide extraordinary monetary policy support to the economy.”

Tony Stillo, director of Canada economics at Oxford Economics further explains the economic recovery being stalled by the unpredictability of the third wave in Canada.

“We expect the Bank of Canada will not lift the policy rate despite a temporary rise in inflation this spring and a stronger than expected economy in Q1. Still, prospects for the economic recovery in Q2 hang in the balance of a race between vaccine distribution and the rapid spread of more transmittable virus variants.”

Economic outlook

Despite rumours earlier in the year about the risk of further rate cuts, our panel of experts continues to believe the next rate move will be up just as they did in the last report – in fact, 22 of the 23 respondents agreed it would rise, with only one expert believing the rate would move down before it rises again.

The more interesting question of WHEN the rate will rise again shows a further shift in the panel’s perception from the latest Bank of Canada survey in January and March.

While in the last report about half of economists (52%) believed the rate would hold for two or more years, experts think rates will rise much sooner now. In fact, a whopping 88% of economists now believe the rate will only hold for 2 years or less, with more than half (54%) believing the second half of 2022 is when the rate will rise.

In the March report, 15% believed the rate would remain for 3+ years and as many as 31% believed the same in January. Now not a single economist believes the rate will hold for three or more years.

Unlike the majority, Stephen Brown, senior Canada economist for Capital Economics believes a rate hike is a little further off.

We think the Bank will wait longer than in the past before it raises interest rates, until it sees conclusive evidence that there is a risk of inflation moving above 2% on a sustained basis.

Tony Stillo, director of Canada economics at Oxford Economics, agrees the Bank will keep rates low until early 2023 when the output gap will have closed and inflation will be sustainably near the Bank’s 2% target.

Roelof van Dijk, senior director, national research & analytics, for Colliers International explains holding the rate into 2023 will give businesses and consumers a chance to address high debt levels.

Although I think there will be reasons for raising rates earlier, I think there is a need to keep rates low in order to allow businesses and consumers time to work through high debt levels, and raising rates too soon could capsize the economic recovery by pushing those on the brink over the edge, but also this allows Canada to devalue the dollar if the US raises rates first.

Is the Bank exposing itself to economic or political risk?

The Bank of Canada has been buying up trillions of dollars’ worth of federal government bonds since the start of the pandemic, with plans to continue to do so while they taper quantitative easing measures in 2021.

The question we asked our economists is whether they believe the Bank of Canada is taking on increased political or economic risk (or both) by owning more than 40% of Canada’s bond market.

The results were very divisive but the majority of economists (63%) believe the Bank of Canada is taking on either political or economic risk by owning such a large portion of federal government bonds with many (38%) thinking it risks both.

Sebastien Lavoie, chief economist of Laurentian Bank Securities explains why he thinks the Bank faces both political and economic risk with their bond purchasing program.

“So far, the BoC has communicated to focus on lowering borrowing rates for households and businesses. But with the bond supply increasing on the planet, central banks may have to shift gears and buy several bonds with different maturities at some point to prevent a large increase in bond yields that would choke the recovery despite the addition of fiscal stimulus.”

Sherry Cooper, chief economist for Dominion Lending Centres, agrees that the bond market will become increasingly illiquid. Atif Kubursi, McMaster University Emeritus Professor of Economics, believes this excessive bond buying will wind down this year but cautions the Bank cannot afford to be seen favouring financing government debt.

As for political risk, Philip Cross, senior fellow at the Macdonald-Laurier Institute, points out, “justified or not, opposition parties already accuse the Bank’s actions as politically motivated.”

Housing price predictions for late summer

Finder asked our panellists to assign a percentage value for any anticipated price increases or decreases in 10 of Canada’s major markets. We averaged out the responses and ranked them below from most anticipated to increase in value to least.

The 12 panellists who provided housing predictions forecasted an average increase of 5% in 6 months (October), the same increase that was forecasted in the March BoC report.

Toronto’s real estate market has been very overheated this spring, so there’s no surprise it is in the top spot with a predicted 8% increase in value in 6 months, followed closely by Hamilton and Vancouver at 7% each. Next are Ottawa and Halifax with an anticipated 6% rise in value respectively. Montreal (5%) and Quebec City (4%) are seeing more modest predictions while cities in the Prairie Provinces are forecasted to see the lowest price increases with Calgary, Edmonton and Winnipeg at 3% each.

Real estate speculative bubble ready to burst?

Many experts are astounded at the prices of recent sales in some of Canada’s major markets. Media stories about bidding wars and homes selling as soon as they hit the market for hundreds of thousands over asking are everywhere. Such a frothy market has experts wondering if the bubble will burst and put Canada’s economic recovery at risk.

When we asked our panel of experts, just under one-third (29%) believed Canada’s sky-high real estate prices could send Canada into a recession, while just over a third (38%) did not believe a recession would result, with another 33% unsure.

Moshe Lander, economics professor at Concordia University, believes all this speculation is dangerous and explains the overall market conditions that got us here.

“All of the hundreds of billions of dollars of government spending that has found its way into the economy has had to go somewhere. While the headlines focus on reduced household spending and increased saving levels, that money has ended up in residential markets and the stock market. When the dust settles and something resembling normalcy returns in 2022, these markets will turn sharply and wipe out huge amounts of wealth that households had accumulated (or debt that had been reduced) during the go-go spending binge in 2020 and 2021.”

Kubursi agrees the market is speculative and believes the core of the problem is low supply but fixing the problem is far more complex than short-term measures to cool the market.

The fundamental issue here is what is the relative weight of supply shortages vis-a-vis demand increase. This real problem needs a long-term solution. Short-term measures could exacerbate the problem…In the final analysis, the increase in supply is the sure bet but here is another problem relating to green spaces and the environment. We may have to wait until the interest rates rise to equilibrate the market to reasonable prices.

Carl Gomez, Chief Economist & Head of Market Analytics at CoStar, firmly believes prices are disconnected from fundamentals and “should prices revert, it would have a meaningfully negative impact on household balance sheets that could also reverberate across the financial system. That said, it’s unclear (yet) what the catalyst would be for home prices to unwind.”

Osberg agrees this speculative bubble could send Canada into another future recession simply saying the current price to income ratio is only sustainable at very low interest rates.

Brett House, Deputy Chief Economist at Scotiabank, states, “Canada continues to face a substantial housing supply deficit in its major metropolitan areas, which is set to be made more acute as immigration numbers step up.”

Lavoie is more optimistic about the issue of low supply.

“Housing starts are at an all-time high, meaning supply will eventually catch up to demand. In addition, a few measures to slightly taper off demand such as the higher stress test proposal from OSFI will contribute to cooling the overheating markets.”

Cooper believes there “will be a soft landing in the housing market once more supply comes onto the market and immigration returns to targeted levels.”

Cross is among those who are unsure, saying a housing market crash would “certainly hurt growth, but not sure by itself if a recession results. Depends if the bubble pops because interest rates are rising; in that case, with all the debt we have, I would say yes.”

Van Dijk believes if housing prices crash, we will go into a recession but questions if what we have on our hands is even a speculative bubble in the first place or just a pandemic trend.

“I think what we are seeing is people…need more space during lockdowns to work from home and get some privacy from kids stuck at home. We essentially stole some demand from the future as these people were likely going to make these moves in the coming years; however, this future demand will likely be replaced by higher immigration targets in the coming years.”

Image: Getty