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Bank of Canada interest rate forecast report June 2021

Majority of economists (55%) believe the rate will hold for just 12 – 18 months.

Finder BoC Report: Canada’s Largest Overnight Rate Report

Key findings

  • Nearly every panellist (95%) thinks the Bank of Canada will hold the rate on June 9
  • Majority of economists (55%) believe the rate will hold for just 12 – 18 months
  • Most panellists (57%) believe the rising Canadian dollar will have a negative impact on Canada’s economic recovery
  • Housing forecasted to increase an average of 5% in 6 months’ time
  • Hamilton, Ontario takes the top spot from Toronto in predicted real estate gains by the end of 2021
  • About one-quarter of experts (24%) think grassroots organizations could disrupt and influence Canada’s housing policy

Expert forecasts ahead of the June decision

Sebastien Lavoie
Sebastien Lavoie
Chief economist, Laurentian Bank

Hold

“The focus in moderating monetary accommodation is tied to the pace of asset purchases, not the policy rate.”
Moshe Lander
Professor of economics, Concordia University

Hold

“The vaccine is having the desired effect: new cases are falling, the number of hospitalizations is at 6-month lows, the timetable for second doses is being accelerated forward and most provinces are unveiling reopening plans that could have most of us experiencing something resembling “normal” within the next 1 – 3 months. The Bank of Canada needs to give the economy some space to recover before deciding to increase interest rates.”
Lars Osberg panelist
Lars Osberg
Professor of economics, Dalhousie University

Hold

“Bank of Canada is inflation phobic.”
Tony Stillo
Director of economics for Canada, Oxford Economics

Hold

“We think the Bank of Canada will look through the temporary rise in CPI inflation this year, largely due to base effects, as well as the implications of new fiscal stimulus and keep rates on hold through the remainder of 2021 and 2022.”
Murshed Chowdhury
Associate professor, University of New Brunswick

Hold

“The economy is on the path to recovery with increased vaccination. Economic slack caused by COVID-19 is not absorbed to the level to shift the gear now. However, more action is needed to keep the housing market in control. Otherwise, the economic disparity and subsequent pain would increase terribly.”
Derek Holt
Vice president and head of capital markets economics, Scotiabank

Hold

“Rate-hike risk starts to get more interesting and tangible in 2022 after the BoC exits nonconventional easing programs.”
Atif Kubursi panelist
Atif Kubursi
President, Econometric Research Ltd

Increase

I think inflationary pressures are gathering and the Bank should make sure that these pressures do not engender inflationary expectations. I don’t see a prospect of that given that we are likely to have an election call.”
Philip Cross panelist
Philip Cross
Senior fellow, Macdonald-Laurier Institute

Hold

“The Bank has already raised the possibility of raising in the second half of 2022, but as prices accelerate and the economy has recovered, they will have to move sooner.”
Carl Gomez
Chief economist and head of market analytics for CoStar Group

Hold

“The BoC continues to telegraph that it’s committed to holding its policy rate at its lower bound until the economic slack from the pandemic is absorbed.”
Vik Singh
Assistant professor, Ryerson University

Hold

“Yes, the Bank is taking on political risk [by owning such a large percentage of government bonds].”
Angelo Melino panelist
Angelo Melino
Professor, University of Toronto

Hold

“The Bank has clearly signalled that it won’t be raising rates until the economy is at (or at least very close) to full employment.”
Sri Thanabalasingam
Senior economist, TD Bank Group

Hold

“The Bank will likely wait for more data to assess the progress of the recovery before making tangible moves on monetary policy.”
Brett House
Deputy chief economist, Scotiabank

Hold

“Output gaps in the Canadian economy have not yet reached sufficiently near closure to merit a rate increase at this meeting. Moreover, the tapering of asset purchases has not yet been completed.”
Benjamin Reitzes panelist
Eldar Sehic
chief economist at Anchor Economics

Hold

“The economy is recovering, but unevenly and inadequately. As employment gains momentum and financial markets become more efficient, the economy’s potential will then be in sight and inflationary pressures will intensify.”
Avery Shenfeld
Managing director and chief economist, CIBC

Hold

“Underlying core inflation trends are sufficiently contained by a still-wide output gap.”
Josh Nye
Senior economist, RBC

Hold

“Economy is still a long way from full capacity and BoC has said it wants to see output gap closed before raising rates.”
Roelof van Dijk
Senior director, national research & analytics, Canada, Colliers International

Hold

“Although inflation has moved up, it is likely only transitory. Furthermore, economic growth is improving, however, it remains fragile, and the Bank of Canada is acutely aware of those households and businesses that took on additional debt to make ends meet during the pandemic and how rising interest rates will impact them and economic growth.”

The June 9 decision

For more than a year the Bank of Canada has declared that .25% would remain the effective lower bound, yet with each overnight rate decision in 2021, talk of the next rate hike has moved from several years to one year or less, according to some.

Still, despite this shifting opinion to a sooner rate hike, every panellist out of the 21 on Finder’s panel, with the exception of 1, agreed the Bank of Canada would hold the rate on June 9.

Josh Nye, senior economist for RBC, believes a hold remains in order as “extraordinary monetary policy support is still needed given GDP and jobs shortfall, and sluggish business investment.”

Sri Thanabalasingam, senior economist at TD Bank, agrees with a hold until the pandemic is well under control, pointing out the potential threat new variants pose.

“Uncertainty on the economic recovery is still elevated given the risks posed by variants of the virus. Thus, it may be more appropriate to wait to see the impacts of the vaccine rollout and provincial reopening before moving on monetary policy.”

Eldar Sehic, chief economist at Anchor Economics, agrees with a hold, explaining, “The economy is recovering, but unevenly and inadequately. As employment gains momentum and financial markets become more efficient, the economy’s potential will then be in sight and inflationary pressures will intensify.”

Roelof van Dijk, senior director, national research and analytics, for Colliers International, believes a premature rate hike could pose a risk to debt-burdened Canadians.

“Although inflation has moved up, it is likely only transitory. Furthermore, economic growth is improving, however, it remains fragile, and the Bank of Canada is acutely aware of those households and businesses that took on additional debt to make ends meet during the pandemic and how rising interest rates will impact them, and economic growth.”

Atif Kubursi, president of Econometric Research Limited, was the single panellist who believes the bank will raise the rate June 9, stating, “I think inflationary pressures are gathering and the Bank should make sure that these pressures do not engender inflationary expectations. I do not see a prospect of that given that we are likely to have an election call.”

Economic outlook

The idea that there could be a micro-cut before another rate increase seems to have been all but abandoned with 100% of our panel agreeing the next rate move will be up, compared to the last few overnight rate reports where there were at least a few dissenting opinions.

The more interesting question of WHEN the rate will rise again shows a further shift in the panel’s perception from the last two Bank of Canada surveys in March and April.

While in the March report about half of economists (52%) believed the rate would hold for 2 or more years, the timeline tightened in the April report, when 88% of economists believed the rate would hold for less than 2 years. In fact, now most economists believe the rate will only hold for 12 to 18 months, with more than half (55%) believing the second half of 2022 is when the rate will rise.

A fifth of economists (20%) believe the rate hike could happen in as little as 6 to 12 months and a quarter (25%) now think the rate hike could wait until the first half of 2023.

Brett House, deputy chief economist at Scotiabank, agrees with the majority saying, “On the basis of Scotiabank Economics’ modelling of the Canadian economy, a first rate hike by the Bank of Canada would be merited by the second half of 2022.”

Moshe Lander, senior lecturer at Concordia University explains the current economic landscape and why the second half of 2022 is the most feasible timeline for a rate hike.

“Unless the existing variants prove resilient to the vaccines or unless new, deadlier variants emerge forcing us to backtrack, the economy will reopen this summer and we might even see the reopening of the Canada-US border in the late summer/early autumn. The bank needs to give the economy some time and space to breathe and figure out what things look like before acting. In that time, we are likely to see a federal election, so the Bank of Canada should hold off on its decision until there is some degree of calm so that the increase in rates will not damage a nascent recovery.”

Murshed Chowdhury, associate professor at the University of New Brunswick agrees with the majority but explains the rate “could happen sooner depending on our success to fully vaccinate most of [Canada] and our speed of recovery.”

Philip Cross, senior fellow at the MacDonald Laurier Institute, is slightly more optimistic than the majority saying, “The Bank has already raised the possibility of raising in the second half of 2022, but as prices accelerate and the economy has recovered, they will have to move sooner.”

Unlike the majority, Vik Singh, assistant professor for Ryerson University believes a rate hike is a little further off, stating, “Inflation will be a huge concern going forward fuelled by massive government spending.”

Impact of rising Canadian dollar on economic recovery

The Canadian dollar has been rapidly rising in 2021, which has sparked a debate tied to hot button issues like the impact on Canada’s commodity prices and export business as well as overall inflation concerns, with many experts musing whether the Bank will raise rates sooner, in large part because of the dollar’s recent performance.

The question we asked our economists is whether they believe the rising Canadian dollar will have a mostly positive, neutral or negative impact on Canada’s economic recovery.

The results were somewhat divided, but the majority of economists (57%) believe the rising value of the Canadian dollar will have a negative impact on Canada’s economic recovery, while 33% of experts believe it will be neutral and 10% see it as a positive.

Tony Stillo, Director of Canada Economics at Oxford Economics, like most of the panel, sees the rising Canadian dollar as a negative that may present potential problems to Canada’s economic recovery, specifically Canada’s export sector.

“A stronger Canadian dollar risks hurting Canada’s export competitiveness, which could restrain the economic recovery. The Bank should consider the Canadian dollar with respect to its impact on the economy and inflation. A sustained overvaluation in the dollar could result in permanent scarring on Canada’s export sector and economic potential.”

Lars Osberg, professor of economics at Dalhousie University, agrees that “the rising dollar hurts non-commodity export sales and therefore job creation.”

Kubursi is in the minority that sees the rising dollar as mostly positive.

“In a way, the rise in the exchange value of the Canadian dollar is saving the bank a precipitous action on the interest rate. Appreciation of the dollar (and this is now upward of 18%) translates into shaving this proportion from the cost of imports. On the downside, it is militating against the competitiveness of our exports.”

Derek Holt, vice president and head of Capital Markets Economics at Scotiabank, is among the one-third of panellists who thinks the rising dollar poses both positives and negatives.

“The Canadian dollar is doing what it should in response to commodities and global risk appetite. Its appreciation carries costs as well as benefits to the economy.”

Housing price predictions for end of 2021

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 11 panellists who provided housing predictions forecasted an average increase of 5% in 6 months’ time (December) – the same increase that was forecasted in the April BoC report.

The main difference in this report is that Hamilton has taken the top spot from Toronto for the market experts predict will see the highest gains by the end of the year at an average of 9% by December. Toronto’s real estate market is still hotter than ever with a predicted 7% increase by the end of the year. Rounding out the top of the list are Ottawa and Montreal with a predicted 6% rise.

Vancouver, Halifax, Winnipeg and Quebec City are all predicted to see a 5% increase by the end of the year while cities in the Prairie Provinces are forecasted to see the lowest price increases with Calgary and Edmonton at 4% each.

Will grassroots organizations disrupt Canada’s real estate market?

Canada’s real estate frenzy continues with no major signs of stopping. In fact, with our experts predicting price increases in every major market for the remainder of 2021, the long-awaited correction that young home buyers priced out of the market have been hoping for doesn’t seem to be on the horizon.

It is these young and disenfranchised millennial and generation Z wannabe homebuyers who are forming grassroots organizations like “Canada Housing Crisis” to try and affect change. These organizations are going as far as to lobby the government or paying for billboards in Toronto that use humour to bring attention to the movement in addition to heavy social media activity.

When we asked our panel of experts, just under one-quarter (24%) believed grassroots organizations could actually create meaningful change, while just over a third (35%) did not believe they would be able to make a meaningful impact. Finally, another 41% say they are unsure.

Singh is optimistic grassroots movements fuelled by disenfranchised youth can make a difference in an environment where “housing is unaffordable for first-time home buyers in most of Canada.”

Kubursi believes disruption could happen as “the housing market has eliminated many first-time buyers [who] are beginning to organize and demand relief from the government. The impending election may allow them to have a sympathetic political ear.”

Van Dijk points out that “this pressure has already resulted in stricter mortgage lending criteria and a relatively easy extension of this pressure would be more transparency in the bidding process. However, this is not so much a disruption of the housing market as it is an improvement in the home-buying process for buyers.”

House states “any efforts to increase the transparency of the home-purchasing process in Canada would be useful.”

Lander is of the opinion that while young Canadians have made successful disruptions to the stock market earlier this year, he doesn’t believe they have enough power to make meaningful change in the Canadian housing market.

“The actions taken earlier this year on Reddit did not do any long-lasting damage and lasted only as long as the news cycle allowed. For many individuals, property is their most valuable asset and they will not give in easily to pressure from those looking to damage that value. Young people and millennials might have the power of social media, but the property market is worth trillions of dollars and will not succumb easily to some negative comments on Reddit or Discord.”

Carl Gomez, chief economist and head of market analytics at CoStar Group, agrees that grassroots movements to challenge the Canadian real estate market won’t influence housing policy simply “because this group has very little market power. Also, housing prices, unlike stocks, are sticky.”

Osberg believes “older generations are happy with their capital gains; younger “locked out” people are a minority that will be ignored.”

Cross is also unsure of any impact grassroots organizations like Canada Housing Crisis would have, stating:

“The money involved in the housing market dwarfs their dabbling in the stock market. Any unexpected drop in prices, in today’s environment, would draw a lot of interest.”

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