Finder BoC Report: Canada’s Largest Overnight Rate Report

Key findings

• Every economist (100%) believes the Bank of Canada will hold the rate on September 8
• Majority of economists (87%) believe the rate will hold until second half 2022
• Most economists (93%) believe inflation should be allowed to run further to stimulate the economy
• Housing forecasted to increase at a national average of 2% in 6 months’ time
• Real estate gains expected to slow, Vancouver, Hamilton, Montreal and Ottawa take top spot from Toronto
• Majority of experts (79%) don’t believe the federal government’s housing plan will succeed at addressing Canada’s housing affordability crisis

Expert forecasts ahead of the September 8 decision

• Sebastien Lavoie
• Moshe Lander
• Sherry S Cooper
• Tony Stillo
• Murshed Chowdhury
• Brett House

Sebastien Lavoie

Chief economist, Laurentian Bank

Hold

“The restart is going well as expected in the July MPR but the fourth wave brings uncertainty, as well as the diminishing vaccine efficacy and impact of vaccination passport in some parts of the country. Also, the BoC will need to give details on the reinvestment policy at some point before the end of the year, particularly relative to giving details if they intend to fully end QE before the policy rate liftoff.”

Moshe Lander

Professor of economics, Concordia University

Hold

“The economy actually contracted in the last quarter, underperforming expectations. As covid numbers rise again and provinces implement vaccine passports, there is absolutely no room for an increase in interest rates and the Bank of Canada continues to insist that it is at its lower bound, so the only option is to hold rates where they are.”

Sherry S Cooper

Chief Economist, Dominion Lending Centres

Hold

“The Bank of Canada believes the recent spike in inflation is temporary.”

Tony Stillo

Director of economics for Canada, Oxford Economics

Hold

“Economic momentum is weaker than previously thought given the unexpected contraction in Q2 and StatCan’s preliminary negative print for July GDP. While we still expect a sustained reopening of the economy will lead to stronger growth in H2 and a gradual easing of transient higher inflation, uncertainty and downside risk from the spread of the Delta variant and persistent supply disruptions will keep rate hikes on hold.”

Murshed Chowdhury

Associate professor, University of New Brunswick

Hold

“The path to recovery is yet to be strong enough to reverse the course of the overnight rate. Moreover, the data for the second quarter of GDP and a potential fourth wave of the pandemic does not support changing the rate. ”

Brett House

Deputy Chief Economist, Scotiabank

Hold

“Output gaps are not set to close until mid-2022 or possibly later given Q2’s weak GDP numbers.”

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

Atif Kubursi

President, Econometric Research Ltd

Hold

“We are in the midst of an election period, the BOC is not likely to make a decision that could be considered as an interference on this election. ”

Philip Cross

Senior fellow, Macdonald-Laurier Institute

Hold

“The Bank is publicly committed to holding rates steady.”

Angelo Melino

Professor, University of Toronto

Hold

“Although inflation has been running hot, the Bank can make a good argument that the recent overshooting of its target band is a temporary phenomenon as there has not been enough progress in closing the output gap to justify a rate hike at this time. Moreover, the Bank would not want to do anything unusual that draws attention to itself in the middle of an election campaign.”

Sri Thanabalasingam

Senior economist, TD Bank Group

Hold

“The economy still requires monetary stimulus given that the recovery is from from over. The Bank was likely surprised by Q2 GDP data, which suggests that the economy may not have been resilient as previously expected. Therefore, the interest should remain at its effective lower bound at the next meeting. ”

Eldar Sehic

chief economist at Anchor Economics

Hold

“The economy still requires monetary stimulus given that the recovery is from over. The Bank was likely surprised by Q2 GDP data, which suggests that the economy may not have been resilient as previously expected. Therefore, the interest should remain at its effective lower bound at the next meeting. ”

The September 8 decision

It’s been nearly a year and a half since the start of the pandemic when the Bank of Canada declared that 0.25% would remain the effective lower bound for the overnight rate. During that time there was speculation around a further rate cut or even negative rates to stimulate the economy, but in recent reports the Bank of Canada has provided clear forward guidance, stating the interest rate will hold until inflation targets have been met – likely in about a year. So with this transparency, it’s no surprise every single panellist out of the 15 respondents on Finder’s panel agreed the Bank of Canada would hold the rate on September 8.

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, aligns with the Bank’s recent forward guidance by stating, “Output gaps are not set to close until mid-2022 or possibly later given Q2’s weak GDP numbers.

Eldar Sehic, chief economist, Anchor Economics explains, “The economic recovery continues to struggle to gain real momentum with weak employment and uneven output.”

Tony Stillo, director of Canada Economics at Oxford Economics, explains the macroeconomic landscape influencing the Bank’s current rate policy: “Economic momentum is weaker than previously thought given the unexpected contraction in Q2 and StatCan’s preliminary negative print for July GDP. While we still expect a sustained reopening of the economy will lead to stronger growth in H2 and a gradual easing of transient higher inflation, uncertainty and downside risk from the spread of the Delta variant and persistent supply disruptions will keep rate hikes on hold.”

Moshe Lander, senior lecturer at Concordia University, was the single economist who said the Bank SHOULD decrease the rate, stating he “believes that there is room to decrease interest rates, even going into negative territory. It will not jumpstart the moribund economy, but the Bank of Canada needs to send a signal to the markets beyond its commitment to keep rates low.”

Angelo Melino, professor at University of Toronto, highlights the political considerations of a rate move in the middle of a federal election.

“Although inflation has been running hot, the Bank can make a good argument that the recent overshooting of its target band is a temporary phenomenon as there has not been enough progress in closing the output gap to justify a rate hike at this time. Moreover, the Bank would not want to do anything unusual that draws attention to itself in the middle of an election campaign.”

Sherry Cooper, chief economist at Dominion Lending Centres, believes the Bank sees current inflation spikes as “temporary” and states, “There is still considerable labour market slack and there is time to see if inflation trends downward in the coming months.”

Economic outlook

While the panel is nearly unanimous in its belief the Bank of Canada should hold the rate for now, that sentiment isn’t going to hold long since the vast majority of our experts believe the rate will rise in about a year, give or take a few months.

In this report, 87% of our panellists said they believe the Bank of Canada will raise the rate sometime in the second half of 2022. While these numbers point to a clear consensus in timing, the July report was the one that marked a real shift, with three-quarters of economists believing the rate would rise in 2022, and in the June report just a little over half of economists (55%) believed this would be the time for a rate hike.

Just one expert (7%) thinks the rate hike will happen sooner in early 2022, while one other (7%) sees the rate holding for a little over a year until early 2023.

Brett House, deputy chief economist at Scotiabank, says, “A combination of inflationary pressures and closing output gaps should prompt a rate move by the BoC in the second half of 2022.”

Murshed Chowdhury, associate professor at University of New Brunswick, is part of the majority that pinpoints the second half of 2022 as the most likely time for the next rate hike, saying exact timing “depends on how we handle the fourth wave of the pandemic and the path to recovery in the coming months. The nature of the housing market may warrant an increase in the overnight rate. However, if the economic activity doesn’t expand as desired, we may have to maintain the low-interest rate for a while.”

Atif Kubursi, president Econometric Research Limited, was the only economist who thinks the rate will move sooner in the first half of 2022 due to “Inflationary pressures [that] are accumulating and are already felt in the asset markets.”

Unlike the majority, Stillo was the single expert who thinks the rate could hold into the first half of 2023.

“We think the Bank will keep the policy rate at the effective lower bound until early 2023 when it will begin to lift rates concurrently with the US Fed. However, we expect the Bank will gradually lessen monetary policy support for the economy by continuing to taper its QE program in the coming months, well before it starts to raise interest rates.”

Inflation to stimulate economic growth

The Bank of Canada has maintained that it is aiming for an inflation target within the range of 1% to 3% when recent reports show that inflation has climbed to 3.7% for the fourth straight month – a 10-year high.

However, a recent Globe and Mail article featured research suggesting that inflation should be allowed to run post-recession to stimulate the economy, especially when interest rates are already at their effective lower bound.
When we asked our panel if the Bank of Canada should let inflation run further in 2021 without policy intervention to stimulate Canada’s economy, the majority said yes. In fact a whopping 13 out of the 14 respondents said yes while only 1 said they were “unsure”.

Kubursi is part of the majority and believes, “as long as the unemployment rate remains above the pre-pandemic level, it makes sense to allow the interest rate level to remain low to keep the economy going and to keep servicing the debt cost low so as not to widen the government budget deficit.”

Melino explains the Bank’s historical approach to inflation targets and how it might want to consider changing its strategy going forward.

“The Bank has consistently missed its inflation target on the low side since 2008. I don’t believe the Bank should ignore this and it would be a good thing if it offsets some of its past misses. Going forward, the economy seems likely to hit the effective Zero Lower Bound fairly regularly. A reputation that the Bank will overshoot the inflation target when the economy comes out of a recession will help to make recessions shorter (by raising inflation expectations during recessions) and will reduce longer horizon uncertainty about the path of the price level.”

Lars Osberg, professor of economics at Dalhousie University, and Sebastien Lavoie, chief economist Laurentian Bank Financial Group, aren’t as concerned about inflation as they are with the implications to the labour market – with Osberg simply asserting “full employment should be the priority”, while Lavoie explains in more detail: “The wellbeing of Canadians requires labour market improvements, particularly given the uneven impact of the pandemic-led shutdowns. CPI inflation averaging above 3% this year and close to 2.3% next year is a smaller headwind relative to the missing half a million jobs versus pre-pandemic levels. This being said, it is unclear to us if the BoC mandate will include maximising employment like the Fed starting in 2022.”

Sri Thanabalasingam, senior economist at TD Bank, is the only expert unsure of whether inflation should continue unabated.
“It’s not immediately clear whether the Bank should allow inflation to overshoot. While it could allow for a stronger recovery, if it shifts inflation expectations, it may make it harder for the Bank to bring inflation back down to 2%, without significantly tighter monetary policy.”

Housing price predictions for Q1 2022

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 8 panellists who provided housing predictions forecasted an average national increase of 2% in 6 months’ time (Feb/March), a lower increase than the 4% that was reported in the July BoC report and the 5% in the June report.

While our experts are pointing to a slight cooling of the housing market along with the cooling temperatures as we head into autumn and winter, there are still a few markets whose forecast is sunnier than the rest. Hamilton, Vancouver, Montreal and Ottawa are predicted to see average gains of 3% in 6 months’ time. Canada’s remaining major markets of Toronto, Calgary, Edmonton, Winnipeg, Quebec City and Halifax are expected to see relatively flat returns of 2% each on average.

Will election housing promises make a real impact on affordability?

While Canada’s real estate market is undergoing a seasonal cooling of sorts, there are ongoing issues that prevent it from being affordable for millions of Canadians, especially first-time buyers. As Canada is now in the midst of an election, the federal government has been promising new measures to address this “housing” crisis.

However, a recent Macleans article criticized the federal government’s election promise to address the housing crisis, with a new home buyers plan stating, “Any economist will tell you that subsidizing a scarce good is a great way to further increase prices: worsening the problem it professes to address.”

We asked our panellists if they believe the federal government’s election housing plan provides solutions that will make a significant impact in addressing Canada’s housing crisis. Similar to some of the media sentiment, the majority of our economists (79%) do not believe the federal election promises will do much to improve affordability. Just under a quarter (21%) said they were unsure.

Stephen Brown, senior Canada economist at Capital Economics, believes demand-focused policies could backfire in the long term.

“The focus on demand-side policies should help a small cohort of buyers looking to get into the market soon but, ultimately, will only push up house prices in the long run.”

Lander agrees with the majority and emphatically states “the biggest impediment to affordable housing is on the supply side. As long as municipalities have restrictive zoning laws and continue to block developers from building homes, prices will continue to rise and provide limited options. Subsidies will not reward those that need them as subsidies are a blunt instrument that will benefit those that can already afford a home.”

House states, “Policy efforts to stoke demand will only increase prices. All levels of government need to do the hard work together to enable increased supply of appropriate housing with related services in Canada’s major cities.”

Angelo Melino, professor at University of Toronto, goes further to say, “You can’t improve affordability by subsidizing purchasers. This will just raise the price of the existing housing stock. Affordability requires an increase in the stock of low cost housing.”

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Image: Getty