Bank of Canada interest rate forecast report January 2022

Finder BoC report: Canada’s largest overnight rate report

Key findings

• Just 69% of panellists believe the Bank of Canada WILL hold the rate on January 26
• Only 44% think the bank SHOULD hold the rate on January 26
• Nearly three-quarters (69%) believe the rate will move in Q1 2022
• Nearly one-third of economists (31%) believe further lockdowns will do more harm than good
• One-third (33%) see a housing market correction in the second half of 2022
• Most economists (67%) think millennials will still value homeownership above other investment options

Meet the panel: Expert forecasts ahead of the January 26 decision

The January 26 decision

After nearly 2 years of the Bank of Canada keeping the overnight rate at the effective lower bound and the majority of economists supporting that decision as sound economic policy, it seems the tide is finally trending towards potential movement.

This may explain why, unlike previous surveys where the panel unanimously predicted the rate to hold (this time just 69% said it would), not only did roughly a third (31%) of panellists say that the rate WILL move on January 26, half (50%) think the rate SHOULD move. Only 6% said the rate should decrease.

Derek Holt, vice president and head of capital markets economics at Scotiabank, believes the Bank of Canada is “waayyyyy behind and driving rising macroeconomic imbalances in the process.” Philip Cross, a senior fellow at Macdonald-Laurier Institute (MLI) agrees the Bank is “way behind on inflation.”

Will Dunning, president of Will Dunning Inc, says:

“The BoC should have raised the rate by a half-point last July. The employment-to-population ratio for the prime-age (25-54 years) has been showing full employment since mid-2021. Not only are we at full employment by this measure, but the low prime rate is contributing to asset inflation. While that isn’t part of the BoC’s official mandate, they should be mindful of it – waiting too long is turning asset inflation into a major economic risk.”

While many, such as Tony Stillo, director of economics for Canada at Oxford Economics, recognize the risks of hyperinflation, Stillo believes the bank should hold for now, citing the ongoing pandemic.

Surging Omicron cases, stricter public health restrictions and voluntary social distancing will slow the economy in early 2022. Even if the Omicron wave proves to be short lived, it will result in a temporary loss of jobs and income, higher unemployment and additional slack in the economy. We think the Bank should wait for clear evidence that the Omicron wave and its temporary disruption to the economy have passed before beginning to raise rates.

Sherry Cooper, chief economist at Dominion Lending Centres also thinks the rate should hold as there is “no need to do something immediately.” While Lars Osberg, McCulloch professor at Dalhousie University, agrees with a hold due to “Omicron injecting uncertainty.”

Moshe Lander, senior lecturer at Concordia University, is the single economist who believes the rate should decrease, stating:

“In the past, I have been pushing for the Bank of Canada to signal its commitment to do everything possible to stimulate the economy, including pushing below its claimed effective lower bound…There is no real reason for a tightening of monetary policy either. Inflation is high, but it is transitory and the real economy has yet to show any signs of overheating.”

Economic outlook

While there has been a clear shift from the panel, with many believing a rate hike is in order on January 26 to curb inflation, experts are a little more divided when it comes to when they think the rate will actually move.

As recently as the October report, just 17% believed the rate would rise in the first half of 2022. In December, this moved dramatically to 50%, and now, 75% see the rate moving within the first half of 2022 – with 31% believing it will happen with this rate announcement.

1 in 5 (19%) believe the rate will hold until the second half of 2022 with just 6% seeing the rate holding for 1 year or more.

Brett House, deputy chief economist at Scotiabank believes the bank will and should raise the rate on January 26, citing the need to act now due to a variety of macroeconomic factors:

“The Bank of Canada risks falling behind the curve with inflation and wage expectations rising along with big increases in housing costs, and could contemplate a more front-loaded approach to raising rates in the hope that this would mean a lower terminal rate than our forecast; 2.50% could be adequate to contain price pressures.”

Sebastien Lavoie, chief economist for Laurentian Bank is also among the roughly third of experts who believe the rate will move on January 26.

“On top of the concerning diffusion in inflation across goods and services, the shift from pandemic-related sources of inflation to pure economic ones like wage push inflation, requires the liftoff to occur now, not next spring.”

Atif Kubursi, president at Econometric Research, agrees the rate will move in January stating, “The Bank needs to signal to the market that it will not stay on the sidelines and it is ready to act [to curb inflation].”

Angelo Melino, professor at the University of Toronto, is one of the majority who believes the rate hike will come sometime in Q1 2022 stating, “Inflation is high, expectations are less tethered and it looks like the worst of Omicron will soon be behind us.”

Murshed Chowdhury, associate professor at the University of New Brunswick, agrees with a 2022 Q1 rate hike but adds the Fed in the US moving sooner may have an influence along with bond yields.

“An increase in long-term bond yield signals the urgency to raise the target overnight interest rate. Additionally, the record inflation in the US may push the Fed to act sooner, which is likely to press the Bank of Canada to act sooner than what was projected.”

Nikola Gradojevic, finance professor at the University of Guelph, thinks a rate hike won’t happen until Q3 of 2022.

“The pandemic is clearly seasonal and hopefully it will become ‘endemic’ after the Omicron variant wave ends. Sure, there is an urgent need to fight inflation, but the pandemic is more important than that.”

Lander is the single expert who believes the rate won’t increase until 2023, stating “it will come soon after the economy is on stable footing and can absorb a series of interest rate increases in quick succession.”

Should lockdowns end in 2022?

With the Omicron wave well underway, there are renewed debates around issues like further lockdowns, school reopening and vaccine mandates, with the Quebec government even proposing the unvaccinated be taxed.

We asked our panellists if they agree that further punitive measures for individual Canadians or lockdowns for businesses in 2022 will endanger and cause more harm to the economic recovery than good?

Unsurprisingly for such a polarizing topic, our panellists were divided. Just under a third of them said yes (31%), often seeing more harm than good coming out of further widespread measures like lockdowns. While a little over half (56%) said no, often arguing public health should remain the first consideration. While finally, 13% were unsure.

Kubursi said yes, cautioning a widespread lockdown approach sees all Canadians suffer versus just the vaccine hesitant. “We need to ensure that those hesitating to take the vaccine do not impose on all Canadians the economic cost of lockouts and supply chain disruptions.”

Lavoie highlights the negative impact of ongoing societal disruption:

“Multiple lockdowns cripple business confidence, discourage entrepreneurship, increase the risk of long-term unemployment and skills erosion. One area of improvement would be to give forward guidance on future reopening.”

On the opposite side, for those that said no, such as Chowdhury, public health remained the top concern.

“It’s an unprecedented time that requires unprecedented actions. It’s crucial for the government to make sure citizens are safe. They also need to keep the public informed regarding the outcome of their actions and change the course if required. At the same time, the government needs to make sure that they continue to allow exemptions for people who are medically in need. Recent findings suggest that economic activities rebounded after having most Canadians vaccinated.”

Cross was one of the minority who was unsure, citing the inability to convince every Canadian to get vaccinated since “so few people are unvaccinated, [it’s] not worth arguing about and [it] won’t do anything to change their minds.”

Is the Canadian housing correction looming?

The real estate correction that has been talked about for years could finally be on the horizon in 2022 – at least according to about one-quarter of experts.

A correction happens when the home price index falls not more than 10% from the highest price within a year. When asked if Canadian housing prices would correct this year, 33% said yes. They forecast a correction sometime in the second half of 2022.

Stillo states, “While our current baseline forecast calls for house prices to plateau in 2022, we think there are growing odds of a price correction beginning in H2 this year.”

Just 17% said they see a correction happening in the second half of 2023, while half of our experts (50%) stated they don’t see a Canadian housing correction for the foreseeable future.

House cites the persistent undersupply problem that will not be easily solved.

“Scotiabank Economics does not anticipate a correction in Canadian housing for the foreseeable future because of a persistent structural undersupply problem in most metropolitan areas that will not be unwound quickly, even with robust building, given Canada’s relatively robust population growth compared with other G7 countries.”

Homeownership is still the dream for young Canadians

The last few years have seen younger Canadians jumping into the stock market in the millions, with many of them also investing in cryptocurrency for the first time. We asked our experts if they saw this trend as something that would dampen young Canadians’ desire to invest in increasingly expensive homes.

It seems homeownership is the dream that never dies with Canadians, regardless of generation. More than half (67%) of our panellists believe homeownership will always be the main priority over other investments, while 27% of experts were unsure, and just 7% said the younger generations will invest more in other asset classes in 2022.

House is the one expert who said younger people will continue to invest more and more in other types of assets, stating:

“Relatively low real interest rates, even with the 225 bps of policy rates we anticipate from the Bank of Canada over the course of 2022-23, will remain an incentive for Canadians of all ages to invest in risk assets.”

Gradojevic disagrees, calling out the particularly volatile market environment of 2022, which means housing may still be seen as a safe haven for young investors versus higher-risk investments.

“With the emergence of the Omicron variant, there is too much uncertainty about the markets, especially about the cryptocurrency markets. 2022 will be a key year in the fight against COVID-19. It will either become endemic this year or the damage to the economy will be irreversible.”

Dunning also believes the homeownership dream is still alive for generation Z and millennials, stating many “young Canadians will invest in equities as part of their personal plans to get ready for homeownership.”

Lavoie is also one of about a quarter of experts who is unsure, explaining many young Canadians will continue to flee large metropolitan areas to become homeowners. “The growing adaptation we see comes from the so-called ‘drive until you qualify’, favouring regions located far from urban centres and the Atlantic region.”

Carl Gomez, chief economist and head of market analytics at CoStar Group is also unsure, stating, “Some will and some won’t. Homeownership is far more of an emotional investment, with many seeing it as a right as opposed to just a financial decision.”

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