Residential Market Commentary - Taking a pause, but for how long?
Mar 15, 2023
Today, the Bank of Canada increased its overnight benchmark interest rate 25 basis point to 4.50% from 4.25% in December. This is the eighth time since March 2022 that the Bank has tightened money supply to address inflation.
While the headline increase will certainly make news, it is the Bank’s accompanying commentary on its future moves that will capture the most attention. We summarize the Bank’s observations below, including its forward-looking comments on the potential for future rate increases.
Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, moderating prices for durable goods
Despite this progress, Canadians are still “feeling the hardship” of high inflation in their essential household
expenses, with persistent price increases for food and shelter Short-term inflation expectations remain elevated and while year-over-year measures of core inflation are still around 5%, 3-month measures have come down, suggesting that core inflation has “peaked”
Canadian economic and housing market performance
The Bank estimates Canada’s economy grew by 3.6% in 2022, slightly stronger than was projected in the Bank’s Monetary Policy Report in October, however it projects that growth is expected to “stall through the middle of 2023,” picking up later in the year
Canadian GDP growth of about 1% is forecast for 2023 and rising to about 2% in 2024, little changed from the
Bank’s October outlook The economy remains in “excess demand” and the labour market remains “tight” with unemployment near historic
lows and businesses reporting ongoing difficulty finding workers However, there is “growing evidence” that restrictive monetary policy is slowing activity especially household
spending Consumption growth has moderated from the first half of 2022 and “housing market activity has declined
substantially” As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment is expected to slow Weaker foreign demand will likely weigh on Canadian exports This overall slowdown in activity will allow supply to “catch up” with demand
Global economic performance and outlook
The Bank estimates the global economy grew by about 3.5% in 2022, and will slow to about 2% in 2023 and 2.50% in 2024 -- a projection that is slightly higher than the Bank’s forecast in October
Global economic growth is slowing, although it is proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report
Global inflation remains high and broad-based although inflation is coming down in many countries, largely reflecting lower energy prices as well as improvements in global supply chains
In the United States and Europe, economies are slowing but proving more resilient than was expected at the time of
the Bank’s October Monetary Policy Report China’s abrupt lifting of pandemic restrictions has prompted an upward revision to the Bank’s growth forecast for
China and “poses an upside risk to commodity prices” Russia’s war on Ukraine remains a significant source of uncertainty Financial conditions remain restrictive but have eased since October, and the Canadian dollar has been relatively
stable against the US dollar
Taking all of these factors into account, the Bank decided today’s policy rate increase was necessary and justified.
However, the Bank also offered this important piece of news: “If economic developments evolve broadly in line with (its) outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”
That sounds positive, but as is customary, the Bank also noted that it is prepared to increase the policy rate further if needed to return inflation to its 2% target. It also added the usual language that it “remains resolute in its commitment to restoring price stability for Canadians.”
Although the Bank did not say it, the bottom line is Canadians will have to wait and see what comes next.
March 8, 2023 is the Bank’s next scheduled policy interest rate announcement. First National will be on hand to provide an executive summary the same day. For other capital market insights in between, please visit the Resources page of our website on a regular basis.