Pedro Antunes tells Global News that it expects the central bank to double its key overnight interest rate to one percent in its announcement on Wednesday with an “oversized” 50 basis point increase. It is part of a growing chorus of market economists and meteorologists, who are now broadly expecting interest rates to rise by half a percentage point, the first since May 2000. At the time, the nominal neutral interest rate – the level of interest that allows for full productivity and keeps inflation at target – was around 5 percent. Today, the Bank of Canada estimates that the nominal neutral interest rate is between 1.75 percent and 2.75 percent. The story goes on under the ad “An increase of 50 (basis points) will do much more to cool the economy today than it did then,” Desjardins chief macroeconomic strategist Royce Mendes said in a note. Mendes also said that the Bank of Canada is likely to slow down its monetary policy tightening after April and expects “further interest rate hikes to come in measured steps.” “This will leave the overnight interest rate at 2.00 percent at the end of the year,” he said. Meanwhile, TD Canada’s head of strategy in Canada, Andrew Kelvin, expects the central bank to raise the overnight interest rate to 2.50 percent by the end of the year. Antunes says the move will follow similar voices from the US Federal Reserve to raise 50 basis points as central banks around the world try to control global inflation.
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Antunes spoke to Global News on Tuesday following the release of the Canadian Board of Governors’ latest economic forecast in a report entitled “Normalcy Out the Window”. The combination of the war in Ukraine, COVID-19 uncertainty, rising interest rates and rampant inflation have made the latest board forecasts the most complex Antunes has ever seen in his career. The story goes on under the ad “As Yogi Bera once said, the future is not what it used to be,” he says. “I’ve been doing this job with forecasts for many years and I can not think of another time when there would be so much chaos, really, to try to understand where we think the economy is going. ”
Economic growth could slow in 2023
For example, the Conference Board report notes that there is a “significant risk” surrounding Russia’s invasion of Ukraine, which “destabilizes a world hoping for an improvement in the history of COVID-19.” However, despite the war exerting inflationary pressures on food and gasoline prices, the Canadian economy is expected to benefit from the ongoing war as sharp increases in commodity markets will be a “huge benefit” for its agricultural and energy producers. country, says Antunes. 6:05 How the war in Ukraine threatens the global food crisis How the war in Ukraine threatens the global food crisis – April 5, 2022 Overall, the Conference Council expects Canada’s gross domestic product to grow by 4 percent in 2022 before declining slightly by 3.3 percent in 2023. Trending Stories
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The story goes on under the ad Although the board notes that many Canadians have amassed significant savings in the last two years of the COVID-19 pandemic, rising gasoline prices could curb some of the booming spending this summer. Demand for road trips, for example, appears to have ‘declined’, says Antunes, as motorists feel the sting of pumps. While it may take up to 18 months for higher interest rates to significantly affect prices and the Canadian economy, Antunes says the central bank will need to raise interest rates higher on Wednesday to help bring consumer expectations back under control. and business. When inflation expectations are not anchored, there is a risk that wages will rise in response, putting pressure on businesses to raise prices. This endless cycle of inflation and wage growth is what the bank is trying to avoid, says Antunes, sending a message to the public that it will act to reduce inflation. “It is really trying to maintain its credibility that inflation will be reduced and the bank has the tools and the means to do that,” he says. “It’s a real challenge for the bank just to ensure that people will continue to believe that we will see inflation return to this 2 percent target.” But the Conference Board report also warns that Canadians with high debt levels could begin to feel the pressure if the central bank enters a more aggressive monetary tightening cycle. Antunes notes that many Canadians have taken their pandemic savings higher and put them in the housing market, making these new homeowners vulnerable to interest rate hikes. The story goes on under the ad “With the ratio of nominal household debt to disposable income reaching a record high in the fourth quarter of 2021, higher interest rates could create problems for over-indebted Canadians,” the report said. “We still expect the consumer to lead the Canadian economy, but the combination of rising inflation and higher interest rates could make it difficult.”
How will the housing market react to the increase in interest rates?
The Conference Board report also suggests that Canada’s hot housing market could cool off and possibly head for a correction. The think tank points to rising interest rates, policy adjustments by federal authorities and other levels of government, and changes in consumer attitudes as part of the removal of gas from the housing market. 4:17 Will interest rate changes soften the housing market? Will interest rate changes mitigate the housing market? – April 4, 2022 “After years of high profits, we believe this could finally be the year in which Canadian home purchases are slowing,” the report said. The story goes on under the ad Following a 22.5 percent increase in the total resale price of homes last year, the Conference Board forecasts an eight percent increase in resale prices in 2022 as the cooling will take effect in the second half of the year. The board continues to forecast a price drop of six percent in 2023, with the risk of a “sharp correction” if real estate investors sell their shares in a relaxing market. BMO senior economist Robert Kavcic told Global News in late March that a series of interest rate hikes, combined with government measures aimed at cooling the housing market, could lead to house prices falling by as much as 10%. next two years. He described the rise in interest rates as “the only major measure we can take here to ease the rise in house prices and inflation in general.” One of the biggest factors that could affect the affordability of homes is the expectation of more supply in the market, says Antunes. The report calls the builders’ efforts to increase the supply of housing as a “Herculean effort” with a record number of housing starts recorded in November 2021, as the industry faced supply chain constraints and labor shortages. The federal government has also stated its ambitions to double the annual number of new units in Canada to 400,000 per year over the next decade. The story goes on under the ad
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“Many of them have been suspended. It was difficult to gain the power of the individual in the construction industry to complete many of these projects. “But it is coming,” he says. Despite the title of the Conference Board report, Antunes believes there are signs of a housing market balancing after two years of rampant growth. “With interest rates rising, with normalcy returning to the economy, perhaps demand will also relax and help the market balance to something more normal,” he says. “We just think it’s been very sparkling for the last two years.” – with files from the Canadian Press 2:16 Federal housing money may not cool the hot market Federal housing may not cool the hot market © 2022 Global News, part of Corus Entertainment Inc.
