The Bank of Canada is expected to hold its key interest rate steady at 5.00 per cent on Sept. 6 and stay at that level through at least the end of March, 2024, according to a majority of economists in a Reuters poll, with a small but growing minority expecting one more rate rise.
Inflation, which the Canadian central bank targets at 2 per cent, rose more than expected to 3.3 per cent in July, and further price rises continue to be the upside risk to expectations the BoC has already reached its terminal rate.
The housing market, where prices surged about 50 per cent during the coronavirus pandemic and have fallen only about 10 per cent from their peak, is also showing signs of a revival, with forecasters in a separate Reuters poll raising price expectations for this year.
For the time being, an expected slowdown in economic growth to 1.1 per cent in the second quarter and a rise in the jobless rate gives Bank of Canada policy-makers plenty of room to leave interest rates unchanged next week.
Thirty-one of 34 economists polled Aug. 24-30 expect no change to the central bank’s overnight rate, with the remaining three expecting a 25-basis-point rise. Interest rate futures are pricing in no change next week, but are nearly split over whether rates rise once more.
“Our base case call at the moment is for them to keep the overnight rate steady at 5.00 per cent … [and] throughout the rest of this year,” said Claire Fan, an economist at RBC.
Fan pointed out that by the October meeting, policy-makers will have two more job market and inflation reports to consider.
In the latest poll, eight of 34 economists expect one more rate rise to 5.25 per cent by the end of this year, compared with only one in a July poll. In response to an additional question, 60 per cent of respondents, 12 of 20, said the risk of the central bank raising rates once more from the current level was high.
“We expect the Bank will hold the overnight rate steady at 5.00 per cent through mid-2024 as the full impact of past rate hikes helps push the economy into a moderate recession. Still, additional BoC rate hikes are possible if economic growth is stronger than we anticipate,” said Tony Stillo, the director of Canadian economics at Oxford Economics.
A majority of economists, 24 of 34, expect the central bank will keep its policy rate at the current level or higher until at least the end of March, 2024. The median shows 50 basis points worth of cuts by the end of June next year, in line with expectations for the U.S. Federal Reserve.
A scenario in which Canadian interest rates stay higher for longer could increase pressure on highly-indebted households, with almost 20 per cent of Canadian mortgages due for renewal next year.
The Aug. 14-29 poll of 13 property analysts forecast average home prices would fall 5.0 per cent this year, less severe than the nearly 9-per-cent drop expected just three months ago. Analysts expected a 12-per-cent fall in home prices at the beginning of the year.
“We’re not anticipating further rate increases from the Bank of Canada, but that threat alone is enough to keep buyers on the sidelines for the rest of this year,” said Sal Guatieri, senior economist at BMO Capital Markets.
“It won’t be until early next year … when it becomes clear the bank’s next move is to lower rates, that we’ll see the housing market strengthening once again.”
The prospect of higher mortgage repayments on ever-more-expensive property, along with record immigration, is expected to drive further demand for rentals.
When asked what will happen to average rents for the rest of 2023, all 10 analysts said they would either rise slightly (5) or rise significantly (5). A majority of analysts also said rental affordability would worsen over the coming year.
“I think rents will continue to rise across Canada because of the shortage of housing that we’re seeing and the underlying sturdy demand,” BMO’s Mr. Guatieri said.