Memo 1: Another quarter-point hike from the US Fed
The US Federal Reserve – the American counterpart to the Bank of Canada – took a page from the latter’s playbook this week, delivering a 0.25% rate hike on Wednesday. The increase – which was widely expected by markets – brings the Fed’s target range to 5.25% - 5.5%, a 22-year high.
Like the BoC's Governing Council, the Fed’s policymakers remain concerned that inflation growth is “stickier” than they’d like, despite promising progress; US CPI declined for the 12th consecutive month in June to 3%. It’s a similar picture to what’s unfolding in Canada, with our headline rate of inflation coming in at 2.8% in June, but the core measure stubbornly hovering at 3.52%.
“The Fed clearly is not convinced that recent slower inflation readings will be sustained without further softening in the macroeconomic backdrop,” writes RBC Assistant Chief Economist Nathan Janzen in an analysis note.
“But further movements in interest rates will be highly data dependent and the Fed is well aware that interest rate increases impact the economy with a substantial lag.”
The Fed’s statement also emphasizes that future rate announcements will be increasingly data dependent, leaving the door open both to potential future hikes, but also cuts as early as next year if inflation falls back in line.
As Desjardins Economist Tiago Figueiredo put it, “Whether or not the Fed raises rates any further will depend on the slew of incoming data. If, as we expect, economic activity cools off and the deceleration in inflation proves durable, another rate hike won’t be necessary.”
What this means for Canadians: It appears both the US and Canadian central banks are nearing the end of their historic rate hiking cycles, as inflation seems to be falling in line with expectations, meaning rate stability – or even rate cuts – could be on the horizon next year. However, it’s too soon to truly forecast what could occur in the Bank of Canada’s upcoming September announcement, as core inflation remains high. Bond yields have remained elevated in the 3.9% range following the Fed’s move, meaning fixed mortgage rates are on the rise again as well, with the lowest five-year fixed high-ratio option available reaching 5.04% today.
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Memo 2: The Bank of Canada (almost) left rates unchanged in July
Speaking of central bank decisions, it turns out the Bank of Canada was strongly considering leaving the Canadian cost of borrowing unchanged in July – but policymakers ultimately decided to deliver their quarter-point hike due to those core inflation concerns.
In the Bank’s most recent Summary of Deliberations out this week, they write, “Despite substantial tightening of monetary policy over the past year, underlying inflation pressures had proven to be more persistent, leading major central banks to signal that further tightening may be needed to tackle inflation.”
“The discussion turned to whether it was appropriate to raise the rate in July or wait for more evidence to solidify the case for further tightening. The consensus among members was that the cost of delaying action was larger than the benefit of waiting.”
The Bank is toeing a delicate balance these days, as they’re keen to dampen inflation growth as quickly as possible, but risk overtaxing consumers with the rapidly increasing cost of borrowing. Some prominent economists haven’t been shy to express they feel the BoC has already tweaked rates too much; CIBC Deputy Economist Benjamin Tal has stated to media and in research notes that the BoC is “overshooting” with its rate hikes, and has further increased the chances of a recession as a result.
Memo 3: Economists think cuts are coming
No one truly knows where the Bank of Canada will go next on rates – but a group of economists and analysts have offered their best educated guess.
The results from the central bank’s second-quarter Market Participants Survey were released this week; the survey polled participants between June 8 and 19 on their thoughts regarding future interest rates, GDP, top risks facing the Canadian economy, and more.
Perhaps the most intriguing takeaway is that these experts strongly expect that rate hikes are finished for the time being and that cuts are on the horizon, with the median anticipating the Bank’s Overnight Lending Rate will hold at 5% until the end of 2023, and be lowered by March 2024.
However, that timeline has been pushed back slightly from the findings revealed in the Q1 version of the survey, where participants called for rate cuts as early as next January. Those responses were collected during the Bank’s five-month rate hold, which ended on June 7th with a fresh 0.25% increase. It’s worth noting that these most recent responses were also collected before the Bank delivered its most recent quarter-point hike on July 12.
The group also appears to anticipate that fixed mortgage rates will remain higher for longer, with bond yields not expected to soften until the end of 2023; the median then calls for a range of 3.4% for the five-year government of Canada yield – down from the steep 3.9% they’ve been hovering at in recent days. Yields won’t dip below the 3% mark again until the following year, however, with the median calling for a range of 2.94% by the end of 2024.
The group also expects that GDP will start to edge higher by the end of the year, predicting 0.7% growth compared to the -0.1% contraction they called for in the last survey.