The Bank of Canada’s recent .5% bump in its overnight rate surprised a lot of market watchers who were expecting an increase of .75%..Benjamin Tal, deputy chief economist at CIBC, told Canadian Mortgage Professional the bank’s move signaled it was nearing the end of its hikes, while at the same time saying it wasn’t done..“The narrative is the same, that inflation is an issue and they’re starting to lose sleep over inflation, there’s no question about it,” said Tal. “Basically, what they’re telling you is they’re not done..“Although the market expected 75 basis points and the Bank of Canada delivered 50, it doesn’t mean that they will stop. In fact, they’re telling you ‘We are not going to stop.’”.The bank has one more rate announcement scheduled for this year, on Dec. 7, with Tal expecting a .25% or .5%..With expectations of an imminent recession, either scenario puts the bank at risk of triggering a deeper recession than anticipated, which is not where the bank wants to go, said Tal..“What they’re telling us between the lines is that they don’t want to overshoot. They’re very well aware of the risk of overshooting,” he said. “They know that interest rates have gone dramatically higher very quickly and they are front loading activity.” .“So, they are telling you, ‘We have done most of the job, but it’s not done yet.’”.The rate of inflation decreased marginally from July through to September, but not at the speed hoped for by the bank..Tal believes the bank will put a hold on rate increases after the December announcement to gauge the impact its hikes this year have had on the economy, but won’t hesitate to resume increases if inflation remains stubbornly strong early in the new year..“If inflation does not behave in the first and second quarters of the year, they will have to go in again,” he said. “And that’s their nightmare scenario, that would be overshooting but putting the economy into a more significant recession. So that’s what they’re trying to avoid.”.That the bank didn’t go with a .75% increase may indicate it feels it has some flexibility, said Tal..“It’s interesting that they decided to go with 50 basis points over 75,” he said. “The market gave them a green light to go 75. They didn’t and that’s an interesting thought.”.“I think that the bank tried to make sure that they are not overshooting and tried to buy some time to assess the situation, but they’re telling you very clearly that it’s not over.”.The bank’s hikes have decidedly cooled red-hot housing markets across the country, a problem of its own creation, but most economists, including Tal, expect a soft landing..“This is not a crash. This is not a meltdown,” said Tal. “This is a very healthy correction.”.The hike means immediate increases to mortgage rates, said economist Sherry Cooper..“The prime rate will now quickly rise to 5.95%, increasing the variable mortgage interest rate another 50 basis points, which will likely take the qualifying rate to roughly 7.5%,” said Cooper. “Fixed mortgage rates, tied to the five-year government of Canada bond yield, will be less affected.”.Cooper expected an increase of .75% but even at .5% she said the move “reflected the bank’s significant downgrade to the economic outlook. Weaker growth is expected to dampen inflation pressures sufficiently to warrant the smaller move.”.Future rate hikes will be determined by the stability of the economy, said Cooper..“Barring substantial further weakening in the economy or a big move in inflation, I expect the Bank of Canada to raise rates again in December by 25 basis points and then again once or twice in 2023,” she said. .“The terminal overnight target rate will likely be 4.5%, and the bank will hold firm for the rest of the year.”
