According to several economists, the Bank of Canada might begin lowering its key rate as early as 2023, in the second half of the year. The institution is approaching its objective, which is to push inflation down. For the time being, the inflation rate remains high at 6.9% domesticallybut the signs of easing inflation are multiplying.
It is likely, according to most forecasters, that the central bank will limit its next hikes to 25 or 50 basis points to reach 4.25% at the end of the year or the beginning of 2023. The policy rate might remain unchanged , then, for a good part of the year when the economy will go through a recession period.
The inflation rate will continue to decline, with the GDP which will contract and the unemployment rate which will increase. Slowly but surely, everything will be in place to begin lowering the key rate, if the expected scenario occurs.
Thus, according to Desjardins economists, the key rate, which will reach 4.25% in 2023, will end the year at 3.75%, then will slide in 2024 to 2.25%.
The end of the tunnel
In an economic note published on November 16, the day of the last inflation reading in Canada, Desjardins economists write that traditional and more dynamic measures of core inflation suggest price pressures are fading
.
Easing supply chain disruptions and lower costs for airfares and other travel-related expenses appear to have helped ease key inflationary pressures
they continue.
And so, in their view, inflationary pressures on gasoline and food prices may begin to ease. There does seem to be light at the end of this long tunnel. Underlying inflationary pressures are easing across a wide range of indicators. Although the road to price stability is still long, every small positive development counts.
For its part, TD Bank is also expecting a key rate increase at the end of 2022, beginning of 2023, with a rise that will take us to 4.25%.
But, according to TD, the rate cut in the second half of 2023 will be greater than Desjardins anticipates. The key rate will be 3.25% at the end of next year, TD economists say, and then just 1.75% at the end of 2024.
These are forecasts, of course. But, the downturn in the economy will be significant and will last for some time. We may only be in recession for a few quarters, but a form of economic stagnation might set in, which will, sooner or later, force central banks to act on the evolution of inflation. .
According to TD, the inflation rate will return to 3.1% in the 3rd quarter of 2023, which will allow the central bank to reduce its key rate at that time.
A economic suffering
At the National Bank, too, we expect the key rate to stabilize at 4.25%, then drop to 3.75% at the end of 2023. However, it does not foresee a sharp decline in the rate in 2024, but rather anticipates a drop to 3% at the end of the year.
% of companies estimate more than 50% chance of a recession within 12coming months.”,”text”:”Both the Bank of Canada and the Federal Reserve [américaine] do not hide it, writes the National Bank in a recent economic note. It will take economic pain to get inflation back on track […]. No less than 58% of companies estimate a more than 50% chance of a recession in the next 12 months.””>Both the Bank of Canada and the Federal Reserve [américaine] do not hide it, writes the National Bank in a recent economic note. It will take economic pain to get inflation back on track […]. No less than 58% of companies estimate a more than 50% chance of a recession in the next 12 months.
According to the institution’s economists, the rate hikes are already having their effect.last months is still close to 7%, that of the last three months at an annualized rate was back within the central bank’s target range (1% to 3%)”,”text”:”While inflation for the past 12 months is still around 7%, inflation for the past three months at an annualized rate was back within the central bank’s target range (1% to 3%)” }}”>While inflation for the past 12 months is still around 7%, inflation for the past three months at an annualized rate was back within the central bank’s target range (1% to 3%)they observe.
Several inflation measures show that price pressures appear to be moderating. Between June and September, the median CPI (consumer price index) rose at a rate of 3.5% on this side of the border, which compares favorably with the 8% observed in the United States.
According to the National Bank, so far, things are moving in the right direction for the Bank of Canada, suggesting that we are approaching the terminal rate in this tightening cycle. Indeed, the labor market is showing signs of moderation and inflationary pressures are less acute and diffuse than earlier this year.
The effect of the increase will be threefold, anticipates the National Bank: less wealth for households, loss of purchasing power and a interest payment shock
. Under the circumstances, the central bank will not have to keep its key rate above 4% for a long time. The effect will be felt fairly quickly on inflation, once more according to the National Bank.
Fixed rate or variable rate?
This turnaround expected in 2023 and 2024 will reassure all holders of variable rate mortgages. The rise of the last few months has worried many, and many households are in a perilous financial situation.
A rapid drop in rates at the end of 2023 and in 2024 might once once more prove those who are still betting on the variable rate right.
Historically, for more than half a century and in approximately 90% of cases, people who systematically choose the variable rate will have paid less interest following 25 years than those who have opted for fixed rates. History is no guarantee of the future, but one can think that the fall in rates will relieve more than one.
Despite the rapid rise in rates in 2022, this historical data may have influenced borrowers, as variable rate mortgages have remained popular. According to data from Mortgage Professionals Canada, cited by the Globe and Mail on November 15, 44% of new mortgages were still variable rate in August 2022.
Several mortgage brokers reported to the Toronto daily that the recent increases in September and October by the Bank of Canada did not dampen interest in the variable rate.
Far be it from me to suggest that you choose the variable rate. Take advice from experts to properly assess your needs and your financial situation. However, you should know that following the storm of the past few months, milder weather seems to be on the horizon for interest rates. But, like the weather, it can change quickly!
