After two rate cuts in a row, where does the Bank of Canada go now, with three more rate announcements (September 6, October 25 and December 6) on its schedule. Benjamin Tal, deputy chief economist at CIBC World Markets, speaking to Canadian Mortgage Professional (CMP), has an aggressive outlook for the coming months. “There will be another cut in September,” said Tal, adding economic indicators seem to be trending in the right direction for the bank. “You listen to the language of the Bank of Canada (in its statement Wednesday): very dovish numbers, very dovish language, indicating that September is also in the cards,” he said. “We don’t have much data between now and September to change their mind, quite frankly. So, I think that September will be another move for sure, unless something big happens.” Tal interprets the bank’s language as suggesting it is viewing the economy as operating in excess supply, which indicates there is a “need” for future interest rate cuts. After taking its rate to a historic low of .25% during the pandemic, which created a spending frenzy in Canada, particularly in housing markets, the bank executed a series of rate increases to fight ever growing inflation, with a target of reducing it to between 2% and 3%. Tal feels the bank’s confidence in attaining that goal has increased, with broad inflationary pressures easing and core inflation lingering below the 3% mark for a prolonged spell. “All indications are suggesting that the only reason why inflation is elevated is interest payments on mortgages,” he said. “And they (the bank) realize that that’s not really a good enough reason to keep rates high.” “They’re talking about a situation in which many components of the CPI (consumer price index) are falling or slowing down, so they’re very optimistic about inflation. They’re a little bit more optimistic about economic growth for Q3 and if we miss that growth, that will give them another reason to cut.” In addition to predicting a cut in September, Tal believes there will be at least one more cut after that, also believing an economic slowdown in the US suggests the Federal Reserve is likely to start cutting in September, a move that would ease pressure on Canada’s central bank, whose rate path rarely diverges significantly from the Fed. Tal cautioned the bank’s future moves could get complicated if a Fed cut doesn’t happen. “The only question is if the Fed does not cut in September and the Bank of Canada does,” he said. “That will limit the ability of the Bank of Canada to continue cutting because then the spread between the Fed and the Bank of Canada will be too wide, and that will put pressure on the Canadian dollar.” “That’s something that the Bank of Canada would like to avoid. If the Fed starts moving, which is more likely now, you remove this uncertainty from the equation.” Whether this week’s rate cut, coupled with the cut in June, will create an increase in sales in housing markets, Tal said a “tale of two markets” is in play, with the low-rise apartment space continuing to perform well, due mostly to a of lack of inventory in the condo segment, which appears to be in a recession with little prospect of an imminent recovery. Mortgage holders who are facing refinancing, as well as those who are on variable rates or hold a home equity line of credit, the bank’s cut comes as welcome news in easing borrowing costs that spiked as the bank went on it rate-increase spree. “Every basis point helps and clearly, that’s something that will continue to be the case,” said Tal. The bank’s language in its statement this week is a sign the days of rate hikes are likely over, said Tal. “They were actually even more dovish than expected,” he said, “which is good news for interest rates.”
After two rate cuts in a row, where does the Bank of Canada go now, with three more rate announcements (September 6, October 25 and December 6) on its schedule. Benjamin Tal, deputy chief economist at CIBC World Markets, speaking to Canadian Mortgage Professional (CMP), has an aggressive outlook for the coming months. “There will be another cut in September,” said Tal, adding economic indicators seem to be trending in the right direction for the bank. “You listen to the language of the Bank of Canada (in its statement Wednesday): very dovish numbers, very dovish language, indicating that September is also in the cards,” he said. “We don’t have much data between now and September to change their mind, quite frankly. So, I think that September will be another move for sure, unless something big happens.” Tal interprets the bank’s language as suggesting it is viewing the economy as operating in excess supply, which indicates there is a “need” for future interest rate cuts. After taking its rate to a historic low of .25% during the pandemic, which created a spending frenzy in Canada, particularly in housing markets, the bank executed a series of rate increases to fight ever growing inflation, with a target of reducing it to between 2% and 3%. Tal feels the bank’s confidence in attaining that goal has increased, with broad inflationary pressures easing and core inflation lingering below the 3% mark for a prolonged spell. “All indications are suggesting that the only reason why inflation is elevated is interest payments on mortgages,” he said. “And they (the bank) realize that that’s not really a good enough reason to keep rates high.” “They’re talking about a situation in which many components of the CPI (consumer price index) are falling or slowing down, so they’re very optimistic about inflation. They’re a little bit more optimistic about economic growth for Q3 and if we miss that growth, that will give them another reason to cut.” In addition to predicting a cut in September, Tal believes there will be at least one more cut after that, also believing an economic slowdown in the US suggests the Federal Reserve is likely to start cutting in September, a move that would ease pressure on Canada’s central bank, whose rate path rarely diverges significantly from the Fed. Tal cautioned the bank’s future moves could get complicated if a Fed cut doesn’t happen. “The only question is if the Fed does not cut in September and the Bank of Canada does,” he said. “That will limit the ability of the Bank of Canada to continue cutting because then the spread between the Fed and the Bank of Canada will be too wide, and that will put pressure on the Canadian dollar.” “That’s something that the Bank of Canada would like to avoid. If the Fed starts moving, which is more likely now, you remove this uncertainty from the equation.” Whether this week’s rate cut, coupled with the cut in June, will create an increase in sales in housing markets, Tal said a “tale of two markets” is in play, with the low-rise apartment space continuing to perform well, due mostly to a of lack of inventory in the condo segment, which appears to be in a recession with little prospect of an imminent recovery. Mortgage holders who are facing refinancing, as well as those who are on variable rates or hold a home equity line of credit, the bank’s cut comes as welcome news in easing borrowing costs that spiked as the bank went on it rate-increase spree. “Every basis point helps and clearly, that’s something that will continue to be the case,” said Tal. The bank’s language in its statement this week is a sign the days of rate hikes are likely over, said Tal. “They were actually even more dovish than expected,” he said, “which is good news for interest rates.”
