Skip to main content
Ratehub logo
Ratehub logo

Why rate hikes are (probably) over for now

Your mortgage memo news for the week of May 5, 2023

Memo 1: One last (maybe) hike from the Fed

The US Federal Reserve – the American counterpart to the Bank of Canada – increased its policy rate on Wednesday by 0.25%, in what is widely believed to be the last rate hike of this economic cycle.

Like the BoC, the Fed has been on a mission to reign in soaring inflation, which spiked in response to ending pandemic lockdowns, rising oil prices, and war in Ukraine. US CPI hit a four-decade high of 8.5% in 2022 – even higher than Canada’s peak of 8.1% last June. In response, the Fed’s Federal Funds Rate has had to rise 500 basis points to 5.25% – the highest in 16 years – over a series of 10 rate hikes.

But that could now be in the rear-view – in a statement following its policy meeting, the Fed strongly hinted it will follow the BoC’s lead and switch to a rate hold stance moving forward, as long as inflation and other economic factors continue to trend lower. The key here was a shift in the Fed’s announcement language, that they will now be monitoring data in “determining the extent” of whether future hikes will be needed. This is a notable pivot from their previous announcements, in which they clearly stated additional hikes would be needed.

In a news conference following the policy meeting, Fed Chair Jerome Powell tried to keep rate expectations ambiguous, saying the central bank is still determining whether they will indeed move forward with a hold, and remain prepared to hike again if need be, with the Federal Open Market Committee (FOMC) assessing the situation on a meeting-by-meeting basis. He elaborated that there remain a number of risks facing the US economy including recent instability in the regional banking sector, and stronger-than-expected jobs and GDP reports.

But markets and analysts seem willing to bet that rate holds are here to stay.

“Between growing cracks in the labour market, signs the economy is losing momentum, and uncertainty around the impact of banking turmoil, we think the Fed has plenty of cause to move to the sidelines after today’s rate increase,” wrote RBC Senior Economist Josh Nye in a Daily Economic Update note on May 3.

“At his press conference, Chair Powell called that a 'meaningful change' but also said 'a decision on a pause was not made today.' With 7 of 18 FOMC participants in March thinking rates would have to move even higher, we can’t rule out one more hike at this stage. But in our view this new language suggests the Committee’s base case is to pause in June—in line with our forecast, consensus, and market pricing—and the onus is on data to surprise to the upside for rates to rise further.”

Memo 2: Strong Canadian job numbers continue to surprise

Talks of a potential recession may be growing louder, but the Canadian labour force continues to buck the trend. The April report from Statistics Canada, out this morning, shows the number of new jobs added to the economy blew away estimates, rising by 41,000 (analysts had expected an uptick of 20,000). The unemployment rate also held steady at 5% for the fifth month in a row.

According to the report, the surge in new positions was largely in the part-time sector, as well as Canadians becoming self-employed. The total number of hours worked rose by 0.2%, A boom in population growth also drove new positions.

A robust job market poses a mixed bag for Canada’s economy right now; while having available work and competitive wages is undeniably positive for workers, it does put pressure on the Bank of Canada’s ability to hold interest rates. The central bank has made it clear the economy needs to cool (along with inflation) before it can in turn lower interest rates – borrowers have been considerably squeezed by the BoC’s historic eight-rate-hiking cycle over the past year, which saw its trend-setting Overnight Lending Rate soar from 0.25% to 5.25%, pulling variable mortgage rates up with it.

Check out the best current mortgage rates

Take 2 minutes to answer a few questions and discover the lowest rates available

However, cracks may be forming. Another analysis by RBC Assistant Chief Economist Nathan Janzen says that while employment remains strong, “the labour market lags the broader economic cycle, and GDP growth softened over February and March after surging higher in January.”  

He also points to the recent Q1 Business Outlook Survey conducted by the BoC, in which business owners reported labour shortages were starting to ease. As a result, wage growth is expected to start to cool; it was down to 5.2% year over year growth in April from 5.3% in March, and will slow further along with labour demands. 

“For now, labour markets look very firm, and continued to surprise broadly on the upside in April,” Janzen writes. “But growth headwinds from aggressive interest rate hikes over the last year continue to build, with tightening credit conditions in the U.S. adding to downside risks. With growth concerns building, the BoC is likely done hiking interest rates.”

Memo 3: Forget seeing pre-pandemic home prices again

The biggest question posed by today’s homebuyers and sellers is whether the correction is over for home prices. Following an enormous runup during the pandemic, the Canadian average price plummeted once rate hikes started to bite, down by 15% – a dollar difference of $130,349 – in March from the February 2022 peak.

According to the latest Housing Market Outlook report from the Canada Mortgage and Housing Corporation (CMHC), prices will continue to decline this year, before tight supply pushes them higher in the second half of 2023. Rental affordability will continue to tighten, and overall, buyers can forget prices reverting to the levels they were at pre-pandemic.

“Higher mortgage rates and a long-term lack of supply of new housing will make homeownership even less affordable,” states the report.

The Crown Corporation forecasts the average home price will dip to $643,325 in 2023 – while that’s 9% below 2022’s average of $703,875, that comes in 14% higher than 2020 levels. Prices will then rise further to $694,196 in 2024 and $746,410 in 2025, according to the report.

Also read: