Finder BoC Report: Canada’s Largest Overnight Rate Report

Key findings

• Every panellist (100%) believes the Bank of Canada will hold the rate July 14
• Majority of economists (74%) believe the rate will hold for just 12 – 18 months
• Most economists (78%) believe there will be some political or economic risk to ending pandemic emergency support programs
• Housing forecasted to increase at a national average of 4% in six months time
• Real estate gains in next 6 months expected to slow, Toronto remains in the top spot
• Majority of experts (79%) don’t believe the bank should raise rates sooner for the purpose of cooling the housing market
• The average rate experts cited as one that could start to see home prices decrease was – 1.25% – a full 1 basis point more than where it stands now

Expert forecasts ahead of the June decision

• James Knightley
• Moshe Lander
• Lars Osberg
• Tony Stillo
• Murshed Chowdhury
• Derek Holt

James Knightley

Chief International Economist, ING

Hold

“The economy is in recovery mode, but with the pandemic still not over the BoC are likely to stick to their guidance that QE tapering is the first order of the day and that interest rate hikes are a 2H 2022 story.”

Moshe Lander

Professor of economics, Concordia University

Hold

“Despite the relaxation of many of the restrictions placed on the economy, there is still not enough to indicate that the economy is back to full employment, let alone overheating in a way that necessitates an increase in the overnight rate. The Bank of Canada will start watching a little more closely in the last half of 2021, but do not anticipate action until 2022.”

Lars Osberg

Professor of economics, Dalhousie University

Hold

“Not enough change [to warrant a rate move]”

Tony Stillo

Director of economics for Canada, Oxford Economics

Hold

“The Bank’s forward guidance continues to stress it will hold off hiking the policy rate hike until excess slack is fully absorbed and inflation stabilizes at 2% after its current transitory rise, something it expects in late 2022.”

Murshed Chowdhury

Associate professor, University of New Brunswick

Hold

“We are on the path to recovery. Substantial progress needs to be made before tightening the belt by raising the interest rate. It would be too early to act. We have not seen much action from the FED either. Investors need to have enough warning before raising the rate. However, more actions are needed to cool off the housing market.”

Derek Holt

Vice president and head of capital markets economics, Scotiabank

Hold

“Macklem has said they will hike when spare capacity has been shut and we’re not there yet. They also have a lot of preparatory work to do first in terms of their QE program.”

• Atif Kubursi
• Philip Cross
• Carl Gomez
• Vik Singh
• Angelo Melino
• Sri Thanabalasingam

Atif Kubursi

President, Econometric Research Ltd

Hold

“I believe we are close to the day the Trudeau government will announce the call for elections. I do not believe the BOC will announce a rate hike during an election.”

Philip Cross

Senior fellow, Macdonald-Laurier Institute

Hold

“The Bank has clearly indicated no change this year.”

Carl Gomez

Chief economist and head of market analytics for CoStar Group

Hold

“Despite inflation heating up (primarily due to base effects) the economy is not yet out of the woods while there is still plenty of slack. This continues to necessitate a steady stance on monetary policy.”

Vik Singh

Assistant professor, Ryerson University

Hold

“Too many variables such as inflation concern and Delta varriant.”

Angelo Melino

Professor, University of Toronto

Hold

“The economy has not yet recovered so it needs continued monetary support. Although inflation is running hot currently, this largely reflects base year effects and supply disruptions and does not yet call for monetary tightening.”

Sri Thanabalasingam

Senior economist, TD Bank Group

Hold

“The economy is recovering largely as the Bank had expected. Unemployment is still very elevated and it will take time for these workers to be reabsorbed into the labour market. Monetary policy will need to remain supportive through the transition.”

• Brett House
• Eldar Sehic
• Avery Shenfeld
• Josh Nye
• Sherry Cooper

Brett House

Deputy chief economist, Scotiabank

Hold

“A hold on July 14 is consistent with the Bank of Canada’s monetary policy framework and its recent communications.”

Eldar Sehic

chief economist at Anchor Economics

Hold

“The economic recovery has been shaky and uneven. Along with the relatively low inflation and troubling high debt, employment and output continue to struggle.”

Avery Shenfeld

Managing director and chief economist, CIBC

Hold

“We’re still too far from full employment to begin a tightening cycle.”

Josh Nye

Senior economist, RBC

Hold

“Canada’s economy is still a long way from returning to full capacity, which the BoC has set as a condition for beginning to raise interest rates. Inflation is above target but is likely to moderate in 2022.”

Sherry Cooper

Chief Economist, Dominion Lending Centres

Hold

“They have telegraphed that they will keep overnight rates on hold until at least next year.”

The July 14 decision

Since the start of the pandemic, the Bank of Canada has declared that .25% would remain the effective lower bound yet now that we are halfway through 2021 talk of the next rate hike has moved from several years to one year or less according to most experts.

Still, despite this shifting opinion, every single panellist out of the 20 on Finder’s panel agreed the Bank of Canada would hold the rate on July 14. 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.

Eldar Sehic, chief economist, Anchor Economics explains, “The economic recovery has been shaky and uneven. Along with the relatively low inflation and troubling high debt, employment and output continue to struggle”.

Moshe Lander, senior lecturer at Concordia University explains how the Bank of Canada plays such a pivotal role in keeping the economic recovery on track and how a premature rate increase could derail it at this crucial time.

“Many economic recoveries have been derailed by a precipitous move by the central bank to increase interest rates. This [time] is probably more important than any in the last 75 years because of the tectonic shift that various sectors have had to undergo because of the pandemic. The Bank of Canada has built up a lot of credibility as an inflation fighter. Let the economy grow and maybe even overheat a little before snuffing out this recovery. If there are no signs of inflationary pressure in the labour market, then everything else can be allowed to run its course.”

Murshed Chowdhury, associate professor at the University of New Brunswick agrees raising rates too soon could hinder the recovery and, “keeping inflation on target and not letting the currency appreciate too much are the two critical factors during our path to recovery…However, we may need actions to cool off the housing market to keep housing affordable for younger generations.”

James Knightley, chief international economist for ING agrees with the current position of the BoC to hold the rate, highlighting the risk of the delta Covid-19 variant and pointing out there is, “still spare capacity in the economy so an interest rate move is not a pressing requirement.”

Philip Cross, senior fellow at the MacDonald Laurier Institute, agrees there is “still too much uncertainty about where the US economy and ours is going, especially as Delta takes hold in the US.”
Atif Kubursi, president of Econometric Research Limited, was the single panellist who believes the bank should raise the rate on July 14.

“We have an asset bubble in the real estate market, stock market and other wealth markets. The BOC has an inflation target but it seems that it has taken its eyes off the asset markets. Maybe it is time to create a hybrid target that takes into account inflation in the goods market and equally any unreasonable inflationary pressures in the asset markets.”

Economic outlook

Clearly, there is a consensus from our panel that the Bank of Canada is being prudent and cautious in regards to holding the rate. So when we asked WHEN the rate will next increase shows a clear consensus on timing as well.

This consensus only became fully evident with this July report where a whopping 74% of economists said they believe the Bank of Canada will raise the rate sometime in the second half of 2022. In the June report, just a little over half of economists (55%) believed this would be the time for a rate hike.

Most of the remaining experts (21%) see an even earlier rate hike in the first half of 2021, with a small minority (5%) seeing the interest rate holding until early 2023.

Brett House, deputy chief economist at Scotiabank says, “inflation expectations are rising as economic re-opening proceeds and output gaps are closing. As a result, we anticipate that the Bank of Canada will need to raise its benchmark policy rate earlier than it has so far communicated.”

Avery Shenfeld, chief economist for CIBC is one of the majority who thinks, “By the latter half of 2022, we expect economic slack to have narrowed and core inflation pressures could require steps to moderate economic growth ahead.”

Josh Nye, senior economist for RBC, “expects Canada’s economy will return to full capacity by mid-2022 and underlying inflationary pressure will begin to firm, setting up for rate hikes in H2/22.”

Sri Thanabalasingam, senior economist at TD Bank agrees with his peers but focuses on employment levels stating, “Labour market slack will likely be absorbed in the second half of 2022, allowing the Bank to hike interest rates. The employment recovery over the summer months will provide signals whether the Bank will move earlier or later than the anticipated time frame.”

Sherry Cooper, chief economist at Dominion Lending Centres fears that inflation will not return to 2% on a sustained basis and “it would be too disruptive to raise rates unexpectedly,” however, she does see the rate rising sooner than the majority of her peers in the first half of 2022.

Unlike the majority, Tony Stillo, Director of Canada Economics at Oxford Economics, was the single expert who thinks the rate could hold into the first half of 2023.

“We think the Bank will want to avoid exerting upward pressure on the Canadian dollar by hiking before the US Federal Reserve, which is expected to begin lifting rates in 2023. We also believe the Bank wants to be careful not to aggravate Canada’s elevated household debt burden and housing vulnerabilities.”

Risks involved with cancelling pandemic income support programs

Earlier in the year, the federal government announced it would extend pandemic benefits (at the time late September 2021 was set as an end date), mainly for the purpose of supplementing the income of Canadians negatively impacted by the pandemic through lost jobs, layoffs, decreased hours and/or wages and small business closures during lockdowns.

The question we asked our Economists is whether they believe the Federal government stopping these pandemic support programs like the Canada Emergency Response Benefit (CERB) or extended Employment Insurance (EI) benefits, both a lifeline for thousands of Canadians during the pandemic, would pose any political and/or economic risk considering the precarious nature of the global economic recovery.

The results were somewhat divided but the majority of economists (39%) believe there will be both political and economic risk when these programs come to an end. About one third (33%) see the risk but believe it will be political only in nature. While a minority (6%) only see an economic rest.

Interestingly 17% see no political or economic risk when these programs end, and the remaining 6% were unsure.

Lander provides a comprehensive view of both the political and economic risks Canada faces for the remainder of the pandemic.

“The political risk is obvious. There is an upcoming election, very likely before the end of 2021, and you cannot run on a platform of cutting spending programmes that have benefited millions of Canadians, no matter how economically sound the decision might be…[because most Canadians are vaccinated] a fall lockdown might look improbable, yet social distancing, mask-wearing, reduced/restricted hours of operation and even limited gatherings could all be in play for the fall and winter. Economically, a complete cancellation of these programmes is likely to cause a level of uncertainty that could cause consumers to reduce their spending by more than a clearly-designed…tapering of the spending programmes would cause.”

Angelo Melino, professor at the University of Toronto sees the risk in ending these programs as purely political, since “in an election year, there is always pressure to spend more and provide more income support.”
Derek Holt, vice president and head of capital markets economics at Scotiabank, is unsure of the risk and feels, “it depends on the speed of a jobs recovery and whether we face an election call.”

Sebastien Lavoie, chief economist Laurentian Bank Financial Group doesn’t see the ending of these programs posing a risk, as from a labour market perspective, “In several sectors, we see companies having difficulties to re-engage the detached workforce. This is different from broad-based shortages.”

Housing price predictions for the 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 9 panellists who provided housing predictions forecasted an average national increase of 4% in six months time (January), a slightly lower increase than the 5% that was reported in the June BoC report.

Toronto has taken back the top spot with a predicted 5% increase from Hamilton, which now joins Vancouver, Calgary and Edmonton with a predicted 4% increase. Montreal, Halifax, Ottawa and Winnipeg had 3% predicted gains. Quebec City came in last with an almost flat prediction of just 2% gains by 2022.

Should the rate be raised to cool Canada’s overheated Real Estate Market?

Canada’s spring real estate market is now winding down for summer after months of bidding wars and some downright outrageous selling prices for the record books. While the summer is a slower time our experts still don’t see a correction on the horizon just yet based on their predicted 4% increase in prices by end of the year.

So, in this overheated real estate market, we asked our panellists what the overnight rate would need to be raised to in order to see home prices across Canada start to decrease. Out of the 9 experts we asked, the responses averaged out to 1.25%.

The bigger question is SHOULD the bank raise rates for the express purpose of managing the runaway real estate market and the unanimous answer seems to be nearly unanimous with 79% of experts saying no.

Lavoie agrees with the majority, stating the Bank raising rates to potentially make housing more affordable for certain segments (i.e. first-time buyers) by seeing prices decrease, is not a simple formula but a decision with many other considerations to keep in mind.

“Killing many birds with one stone is more often a coincidence than anything else when it comes to monetary policy setting with dual objectives. Higher interest rates down the road coming up with the turnaround in global QE is likely to be enough to cool the current overheating housing conditions. The BoC does not need to step in to cool regional housing markets at the expense of a well-established inflation targeting mindset and credible and stable inflation expectations.”

Lars Osberg, professor of economics at Dalhousie University agrees there is “too much downside risk” to this action.

Stillo explains, “raising interest rates is a blunt tool to address the hot housing market, and would likely have unintended negative consequences for the broader economy.”

Carl Gomez, chief economist and head of market analytics for CoStar agrees with Stillo and others explaining, “although low-interest rates have been the rocket fuel for the housing market, monetary policy cannot be conducted in a vacuum and target specific sectors like housing, as it could have negative spillover effects on other parts of the economy.”

Kubursi is one of the dissenters who believes raising the overnight rate is crucial for the housing market and warns if the Bank of Canada waits too long there could be serious consequences.

“Cooling the real estate market and other asset markets is now a prudent policy objective. The BOC has kept an inflation target solely fixed on the goods market. This has exacerbated income and wealth inequality and frustrated the capacity of young people to own their own homes. There will be negative political, social and economic consequences to this blindness to what is happening to asset bubbles.”

Written by

Richard Laycock

Senior editorial manager

Richard Laycock is Finder’s NYC-based senior content marketing manager & insights editor, spending the last decade data diving, writing and editing articles about all things personal finance. His musings can be found across the web including on NASDAQ, MoneyMag, Yahoo Finance and Travel Weekly. Richard studied Media at Macquarie University, including a semester abroad at The Missouri School of Journalism (MIZZOU). See full bio