The decision by the Bank of Canada (BoC) last week to hold its overnight rate at 4.5% for the second time in a row may have sent optimistic feelings through housing and financial markets, but a panel of economists assembled by Finder says ‘not so fast.’. Inflation cartoon .In particular, a majority of the Finder panel doesn't think inflation will be tamed in 2023, pointing to 2024 or later for a return the bank’s target of between 1% and 3%, putting pressure on Canada's housing markets and more price declines this year..“Home sales activity will continue to decrease in 2023,” says Lars Osberg, professor of Economics at Dalhousie University, an opinion shared by professor of Finance at the University of Guelph, Nikola Gradojevic..“The slowdown in home sales has significantly decelerated since the fall of 2022, mainly because the real estate market is already severely distressed. There is not much room for the downside unless a major recession arrives.”.Which is what most members of the panel anticipate..“Forecasts calling for a return to 1% to 3% by the end of 2023 are factoring in an economic slowdown that will be large enough to contribute to the decline in inflation,” says Moshe Lander, senior lecturer in Economics at Concordia University. "[But] the Canadian economy continues to show resilience, especially as labour costs [continue to] rise at an uncomfortably fast pace.”.“These costs, including other input costs such as rising oil prices, will not slow down [the economy] fast enough in the next six months, to allow inflation to hit its target range until the beginning of next year.”.The bank’s next rate announcement is June 7; below are thoughts about its next move from some panelists..Murshed Chowdhury, associate professor, Department of Economics, University of Brunswick:.“Despite the presence of high inflation, it would be wise for the bank to allow itself more time to assess the effects of the previous aggressive rate hikes in the economy. The scarcity of available housing and the crisis in the rental market are significant factors that will prevent a further decline in house prices, despite the downward pressure they would otherwise face.”.Nikola Gradojevic, professor of Finance, University of Guelph:.“The Bank of Canada will postpone any potential interest rate increase possibly until the summer months. Consumer confidence in Canada is still trending downward. Carbon taxes, grocery and utility costs, and stagnation in salary growth (relative to the overall inflation) are hurting Canadians. Another interest rate increase at this time would certainly hurt even more and is unlikely.”.“The housing market recovery may begin late in 2023, continuing into 2024 when the economy is expected to stabilize and inflation to ease. The slowdown in home sales has significantly decelerated since the fall of 2022, mainly because the real estate market is already severely distressed. There is not much room for the downside unless a major recession arrives.”.Derek Holt, VP and head of Capital Markets Economics, Scotiabank:. Bank of Canada .“The BoC's credibility would suffer a further blow if they changed the policy rate at this point given their conditional commitment to stay on pause while evaluating the lagging effects of rate hikes.”.Moshe Lander, senior lecturer in Economics, Concordia University:.“An interest-rate increase is unlikely with a slowing economy already evident and an interest rate decrease is inappropriate given that inflation is still not back within its 1% to 3% target.”.“Rental prices increased rapidly in many Canadian markets, so the relative advantage of renting over owning is not as strong, despite the higher interest rates for mortgage holders. If interest rates have reached, or have nearly reached, the peak of their cycle, and if rents continue to increase, homeowning is still the more attractive form of living and this will boost home sales despite otherwise lacklustre economic data.”.Will Dunning, president, Will Dunning Inc.:.“Eventually, the Bank of Canada will admit four things:.The period of excess inflation was caused by forces that can’t be fixed with interest rates, notably the supply chain and labour supply impacts of a once-in-a-century global health emergency, a war, and decisions by oil-producing countries.The path for inflation (up and down) will largely be determined by factors that are not influenced by interest rates.Interest rates could have a marginal effect on inflation, but that would come at too high a cost.Interest rates have become a major driver of inflation through their impact on housing costs. Plus, there will be long-term inflationary effects, as higher borrowing costs cause reductions in investment, which will impair the productive capacity of the economy.”.“The BoC wants to weaken the employment situation. If they continue on the current path, there is very likely to be a further downshift in home buying.”.The Finder report can be found here.
