Finder BoC Report: Canada’s Largest Overnight Rate Report

Key findings

• Every economist (100%) believes the Bank of Canada will hold the rate on October 27
• Majority of economists (83%) believe the rate will hold until second half 2022
• Most economists (61%) correctly predicted the end to new stimulus/QE
• Housing forecasted to increase at a national average of 3% in 6 months’ time
• Hamilton and Toronto expected to see outsized gains of 5% by Spring
• Majority of experts (59%) believe Canada’s housing affordability crisis (owning and renting) is both a national (supply) and global (low interest rates) problem

• Dominique Lapointe
• Moshe Lander
• Carl Gomez
• Tony Stillo
• Murshed Chowdhury

Dominique Lapointe

Senior Economist, Laurentian Bank Securities

Hold

“The degree of monetary accommodation relative to interest rates remain sufficient and necessary as of October 2021.”

Moshe Lander

Professor of economics, Concordia University

Hold

“Despite one of the highest inflation rates this century, the Bank of Canada has been steadfast in its commitment to holding interest rates at their current level until mid-2022. Its has a tremendous amount of credibility built up over the last 30 years; it will not compromise it by overreacting to a headline-grabbing inflation number when the economy is still weak.”

Carl Gomez

Chief Economist & Head of Market Analytics, CoStar Group Canada

Hold

“The economy (and output gap) is still not at a place which requires an increase in policy rates.”

Tony Stillo

Director of economics for Canada, Oxford Economics

Hold

“While most of Canada is benefitting from the reopening of the economy amid high vaccination rates, persistent snarls in the supply chain, Delta variant caution and surging energy prices have tempered our expectations for H2.”

Murshed Chowdhury

Associate professor, University of New Brunswick

Hold

“As long as the Bank thinks this inflation spiral is transitory, they are unlikely to change the policy rate. However, the signs of lingering inflation must put some pressure on the Bank’s thought.”

• Atif Kubursi
• Philip Cross
• Angelo Melino
• Sri Thanabalasingam
• Eldar Sehic

Atif Kubursi

President, Econometric Research Ltd

Hold

“There is a slight chance that the Bank will preempt expectations and raise by a quarter percent although it appears that the Bank is careful not to jeopardise the timid recovery.”

Philip Cross

Senior fellow, Macdonald-Laurier Institute

Hold

“Clearly inflation can no longer be regarded as just transitory.”

Angelo Melino

Professor, University of Toronto

Hold

“Although inflation and inflation expectations are high there is enough slack in the economy for these numbers to start coming down in early 2022. There is no point raising the policy rate to fight price increases due to covid outbreaks, droughts, hurricanes, or global imbalances in the demand and supply for goods. If inflation expectations don’t start drifting down soon or if wages start to perk up in Canada, the Bank will have to act. But it can wait a bit longer for now.”

Sri Thanabalasingam

Senior economist, TD Bank Group

Hold

“Although price pressures are rising, the Bank has noted that this is primarily due to transitory factors that will fade with time. The Bank will likely stick to this narrative, and focus on the fact that the economy continues to require significant monetary stimulus as it continues down the road to a full recovery.”

Eldar Sehic

chief economist at Anchor Economics

Hold

“While inflation is high, largely due to supply pressures and base effects, the economy’s output and employment still need to gain significant momentum and give sufficient demand pressures for the Bank of Canada to increase the overnight rate next year.”

• Brett House
• Roelof van Dijk
• Derek Holt
• James Knightley
• Avery Shenfeld

Brett House

Deputy Chief Economist, Scotiabank

Hold

“A hold on October 27 would be consistent with the Bank of Canada’s inflation targetting framework and the Bank’s assessment of remaining output gaps.”

Roelof van Dijk

Senior Director, National Reseach & Analytics | Canada, Colliers

Hold

“Despite high inflation and strong employment growth, the economic recovery remains fragile and unequal.”

Derek Holt

Vice President and Head of Capital Markets Economics, Scotiabank

Hold

“Governor Macklem has repeatedly emphasized he won’t hike the policy rate until spare capacity has closed. Canada still has slack in its economy.”

James Knightley

Chief International Economist, ING

Hold

“Growth is strong and inflation pressures are rising, but at this stage it is more a question of dialling back on the stimulus and so we expect to see QE weekly asset purchases reduced by C$1bn.”

Avery Shenfeld

Chief Economist, CIBC

Hold

“There is still too much domestic economic slack to justify raising rates.”

The October 27 decision

The Bank of Canada has maintained that .25% would remain the effective lower bound for the overnight rate, recently maintaining clear forward guidance stating the rate will hold until inflation targets have been met, most likely in 2022. So with this clear guidance, it’s no surprise every panellist out of the 18 respondents on Finder’s panel agreed the Bank of Canada would hold the rate on October 27.

When asked what the Bank should do to the overnight rate only one expert said the rate should rise, the rest believe it should continue to hold.

Brett House, deputy chief economist at Scotiabank reinforces the Bank’s recent forward guidance by stating, “A hold on October 27 would be consistent with the Bank of Canada’s inflation targeting framework and the Bank’s assessment of remaining output gaps.”

Eldar Sehic, chief economist, Anchor Economics explains, “While inflation is high, largely due to supply pressures and base effects, the economy’s output and employment still need to gain significant momentum and give sufficient demand pressures for the Bank of Canada to increase the overnight rate next year.”

Tony Stillo, director of Canada economics at Oxford Economics explains the factors still putting Canada’s economic recovery at risk:
“While most of Canada is benefitting from the reopening of the economy amid high vaccination rates, persistent snarls in the supply chain, Delta variant caution and surging energy prices have tempered our expectations for H2.”

James Knightley, chief international economist for ING points out this rate announcement “is about reducing the policy support at this stage rather than actual policy tightening.”

Avery Shenfeld, chief economist at CIBC believes, “slowing the economy in response to a global supply side shock to prices would be inappropriate. The economy is not overheated on the demand side.”

Atif Kubursi, president Econometric Research Limited was the only expert who said the Bank SHOULD increase the rate, stating he believes that:

“There are reasons to suggest that the inflation rate is already above the control range and that it could slip into the expectations of economic agents which would make future actions by the Bank more difficult and more costly. It is totally understandable that this is not the time to shock the economy as the pandemic is still with us and the government is scaling back its benefits programs and its QE purchases.”

Economic outlook

While the panel is nearly unanimous in its belief the Bank of Canada should hold the rate for now, the timeline for when most believe the rate will hold keeps getting shorter.

More than three quarters (83%) believe the Bank of Canada will raise the rate sometime in the second half of 2022, in line with the existing forward guidance, 17% think it will happen in the first half of 2022, up from just 7% thinking the rate hike could come sooner last year.

House provides a specific timeline, “Scotiabank Economics forecasts a first rate increase from the Bank of Canada in July 2022, in line with the Bank of Canada’s assessment of when Canada’s existing output gaps will be closed and consistent with our forecast profile for inflation.”

Murshed Chowdhury, associate professor at University of New Brunswick, is part of the majority that believes the second half of 2022 is when the next rate hike will happen but cautions “If the inflation rate does not taper off as per Bank’s expectation, they are likely to act earlier than their committed (forward guidance) timeline. However, they also need to keep the exchange rate in check as the oil price is not stable yet.”

While Angelo Melino, professor at University of Toronto, believes rates should hold until the second half of 2022, he also states rates may need to move sooner, “Even if global supply bottlenecks improve, economic slack in Canada should be eliminated by mid 2022. However, the risks are tilted to the Bank having to act earlier to meet its mandate.”

Since the last rate announcement inflationary pressures have been mounting which has many experts believing the rate will move sooner. Philip Cross, senior fellow at Macdonald-Laurier Institute (MLI), is one of these experts, stating “inflation can no longer be considered just transitory.” Kubursi sees the “gathering inflation storm will weigh heavily on the policy makers pressuring them into some action before expectations firm up.”

BoC entering reinvestment phase

The Bank of Canada has been providing stimulus in the form of quantitative easing for the duration of the pandemic but on October 27 they announced it is coming to an end and they are effectively entering the reinvestment phase. In fact, 61% of Finder’s panellists correctly predicted the end to new stimulus before the announcement.

Dominique Lapointe, senior economist at Laurentian Bank Securities explains;

“Extraordinary monetary accommodation relative to bond purchases and balance sheet expansion is no longer necessary as the economy is on path to a full recovery from the global pandemic. There is also a lot of “cash” in financial markets right now.”

Lars Osberg, professor of economics at Dalhousie University also believes new stimulus will cease due to what he deems “inflation paranoia.”

A little over a quarter of experts don’t think stimulus will come to an end just yet with another 11% unsure.

Moshe Lander, senior lecturer, at Concordia University is in the minority who believes quantitative easing shouldn’t end just yet, explaining:

“The underlying GDP figures continue to come in below what is expected…The Bank of Canada may begin to reduce the quantitative easing it has engaged in for the better part of the last decade, but that is different than saying it will stop it cold turkey or begin a different programme. The economy is still not “post-pandemic.”

Cross is the only expert unsure because while “The Bank is beginning to reconsider the pace at which it withdraws stimulus, but has not publicly said how it will do so.”

Housing price predictions

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 9 panellists who provided housing predictions forecasted an average national increase of 3% in six months time (April), a slightly higher increase than the 2% that was reported in the September BoC report and slightly lower than the 4% in the June report.

While our experts are pointing to a generally flat forecast for housing prices by the time we get to the start of the spring market, there are certain cities expected to see outsized gains.

Hamilton and Toronto are forecast to see the highest price increases at 5%, with Vancouver rounding out the third place at 4%. Montreal, Halifax, Quebec City and Ottawa are predicted to see average gains of 3% in 6 months time. Calgary and Edmonton expect to see 2% price gains on average with Winnipeg coming in last with an expected flat 1% average return.

Is Canada’s housing affordability crisis mostly national or global?

While Canada’s real estate market continues to face affordability issues for both homeowners and renters, some recent conversation has focused on whether the more serious issue is national or global in nature.

In fact, a recent Financial Post special report discussed how housing policies in Canada (mainly supply-side) have presented serious issues in housing Canadians for the last 50 years, while another recent report in Bloomberg takes a global look. This Bloomberg report sees Canada in 8th place for housing affordability (for both rentals and home ownership) after countries like Sweden, the U.K. and New Zealand.

We asked our panellists if they believe Canada’s housing affordability crisis (owning and renting) is predominantly a product of a low interest rate environment globally (fuelling a speculative bubble), or a national supply crisis decades in the making.

Interestingly, the majority of our economists (59%) believe the issue in housing affordability, both rental and ownership, is both a global issue in terms of the low-interest environment we are in, along with a national supply crisis decades in the making. Whereas about one third (35%) see it as predominantly a national issue, with (6%) saying they were unsure.

Stillo takes a birds-eye view on this combined global and national housing affordability crisis:

“A pandemic-induced shift in buyer preferences, the expansion in remote working and rock-bottom mortgage rates drove an outburst of housing demand that hit a serious lack of supply, causing prices to surge. Investors, house ‘flippers’, and speculators, accounting for over 20% of nationwide home purchases according to the Bank of Canada, further exacerbated the severe demand-supply imbalance catapulting home prices higher.”

Roelof van Dijk, senior director, national research and analytics at Colliers, like most, believes the housing affordability crisis is national and global in nature.

“Investors are looking for places to park money and Canadian real estate is a great place to do this, and at the same time, Canada has underdelivered new housing supply for decades. Rising immigration post-pandemic will only further exacerbate this situation.”

Carl Gomez, chief economist and head of market analytics at Costar, agrees with van Dijk but states, “Low rates (and relatively easy access to credit) is helping to fuel demand while supply constraints (both geographic and legislative) are preventing it from keeping up with demand.”

Of those that believe Canada’s housing crisis is mostly home-grown, Melino states Canada has “less housing than other countries”, which is reinforced by House who restates, “The dominant issue driving our affordability challenges is on the supply side: as Scotiabank Economics noted in May, Canada has the lowest per capita housing stock in the G7.”