The Bank of Canada conditionally put the brakes on raising its overnight, after eight consecutive increases, with language suggesting it would prefer to keep the rate where it is, 4.5%, for the remainder of the year, Benjamin Tal, deputy chief economist at CIBC World Markets, tells Canadian Mortgage Professional (CMP)..That could change, based on actions by the US Federal Reserve (the Fed), which sets the interest rate down south..Tal said Canada’s bank projected a willingness to diverge from The Fed’s policy even though its chairman, Jerome Powell, indicated more hikes are on his agenda..“I think if you give (the Bank of Canada) the choice, they will actually prefer not to continue to raise because they don’t want to overshoot,” he told CMP..“They are keeping their options open, but at the same time one thing that's interesting [is] although the Fed is sounding very hawkish, and Powell is talking about another 75 basis points potentially, it seems that the Bank of Canada is not paying attention to the gap between the Fed and [itself].”.The fear is if the Feds continues down its aggressive path of rate hikes, it will have a negative impact on the Canadian dollar, widening the gap between it and the US greenback, making products from the US more expensive, sending inflation on another upward spiral..That would force the bank to reverse its decision to pause rate hikes in Canada, although Tal noted the bank has some “breathing space” to assess conditions before making a move..In its statement announcing the hold on Wednesday, the bank said global economic trends played out as it expected in January, with global inflation sliding down and growth slowing. Canada’s inflation rate fell to 5.9% in January, while in the economy remained flat despite strong employment numbers..While those factors may have helped the bank make the decision to keep its rate unchanged, many things could happen before the end of the year to give the bank to continue rate increases, said Tal..“Although [the bank] opened the door to another move, if necessary, they’re basically telling you ‘We don’t have data to justify a rate hike at this point,’” he said. “The labour market is still relatively tight, although [the bank is] starting to look at some aspects of the inability of companies to pass the cost to the consumer because of the reduction in income.”.“So, this suggests that they are willing and hoping that they will not need to raise again, but the options are still open.”.The five-year Government of Canada rate could be set for a small decline in the coming months, Tal told CMP, reflecting a possible calming in the market over the Bank of Canada’s future approach and to some extent the Fed’s..“Over the next six months, my guess is we'll see a modest decline in the five-year rate while the variable-rate mortgage that is linked to the overnight rate will be stable,” he said. “Let’s hope that they will not go by another 25 basis points, but [that’s] still a risk.”.The bank’ rate hold could “inject a wave of optimism” into housing markets as buyers and developers move off the sidelines, Tal said, although he cautioned of a mild impact..Rate stability is “something that will empower people to get into the market and even [allow] developers to start rethinking their plans, and actually go ahead with some plans,” he said..“It’s not going to be a market changer and a game changer, but it’s going to be overall, at the margin, a positive development.”.Tal said the bank’s willingness not to follow in lockstep with the Fed was positive..“I think that the focus should be to what extent they are paying attention to the Fed. I think that’s very important,” he said. “And at this point, it seems they’re willing to ignore the Fed and that’s good news
The Bank of Canada conditionally put the brakes on raising its overnight, after eight consecutive increases, with language suggesting it would prefer to keep the rate where it is, 4.5%, for the remainder of the year, Benjamin Tal, deputy chief economist at CIBC World Markets, tells Canadian Mortgage Professional (CMP)..That could change, based on actions by the US Federal Reserve (the Fed), which sets the interest rate down south..Tal said Canada’s bank projected a willingness to diverge from The Fed’s policy even though its chairman, Jerome Powell, indicated more hikes are on his agenda..“I think if you give (the Bank of Canada) the choice, they will actually prefer not to continue to raise because they don’t want to overshoot,” he told CMP..“They are keeping their options open, but at the same time one thing that's interesting [is] although the Fed is sounding very hawkish, and Powell is talking about another 75 basis points potentially, it seems that the Bank of Canada is not paying attention to the gap between the Fed and [itself].”.The fear is if the Feds continues down its aggressive path of rate hikes, it will have a negative impact on the Canadian dollar, widening the gap between it and the US greenback, making products from the US more expensive, sending inflation on another upward spiral..That would force the bank to reverse its decision to pause rate hikes in Canada, although Tal noted the bank has some “breathing space” to assess conditions before making a move..In its statement announcing the hold on Wednesday, the bank said global economic trends played out as it expected in January, with global inflation sliding down and growth slowing. Canada’s inflation rate fell to 5.9% in January, while in the economy remained flat despite strong employment numbers..While those factors may have helped the bank make the decision to keep its rate unchanged, many things could happen before the end of the year to give the bank to continue rate increases, said Tal..“Although [the bank] opened the door to another move, if necessary, they’re basically telling you ‘We don’t have data to justify a rate hike at this point,’” he said. “The labour market is still relatively tight, although [the bank is] starting to look at some aspects of the inability of companies to pass the cost to the consumer because of the reduction in income.”.“So, this suggests that they are willing and hoping that they will not need to raise again, but the options are still open.”.The five-year Government of Canada rate could be set for a small decline in the coming months, Tal told CMP, reflecting a possible calming in the market over the Bank of Canada’s future approach and to some extent the Fed’s..“Over the next six months, my guess is we'll see a modest decline in the five-year rate while the variable-rate mortgage that is linked to the overnight rate will be stable,” he said. “Let’s hope that they will not go by another 25 basis points, but [that’s] still a risk.”.The bank’ rate hold could “inject a wave of optimism” into housing markets as buyers and developers move off the sidelines, Tal said, although he cautioned of a mild impact..Rate stability is “something that will empower people to get into the market and even [allow] developers to start rethinking their plans, and actually go ahead with some plans,” he said..“It’s not going to be a market changer and a game changer, but it’s going to be overall, at the margin, a positive development.”.Tal said the bank’s willingness not to follow in lockstep with the Fed was positive..“I think that the focus should be to what extent they are paying attention to the Fed. I think that’s very important,” he said. “And at this point, it seems they’re willing to ignore the Fed and that’s good news
