Even though the BoC has paused interest rates for now, a panel of economists say that does not mean inflation will fall to its target range
When the Bank of Canada (BoC) decided to hold interest rates steady at 4.5% at its most recent meeting, it was a pause for reflection.
While the aggressive rate hikes seen over the past year have been focused on controlling inflation, the central bank may have more to do to bring inflation down to its 1-3% target range.
And a panel of economists believes that Canadians are facing above-target price rises for some time to come.
Two thirds of the panel convened by Finder think that it will take until 2024 or longer for the BoC’s inflation target to be met.
“The biggest interest rate increases occurred in mid-2022. If it takes around 18 months for these interest rate increases to have maximum impact, then the effect of those moves should occur in late 2023,” explained Moshe Lander, senior economics lecturer at Concordia University. “If inflation rates come down around 0.25% per month, then inflation will hit the upper band of the Bank's target range in early 2024.”
Given the pessimism on inflation, does the panel think that the BoC should have kept hiking rates?
No, most believe that Governor Macklem and his team did the right thing by pausing to allow the impact of hikes so far to take their full effect before deciding where to go next, although their opinions came before the SVB collapse which has prompted expectation of an early rate cut.
"Although inflation remains high, the Bank must assess the efficacy of its current tightening policy,” said Murshed Chowdhury, associate professor at the University of New Brunswick. “Additionally, increasing rates further could pose a significant risk to economic growth and potentially trigger a recession. The latest GDP figures indicate that the economy didn't expand in the recent quarter, which warrants the Bank to exercise greater caution.”
Most of the panel indicated that rate hikes should remain on hold with 13% of the experts predicting that the BoC will start to cut rates in the fall.
Tony Stillo, director of Canada Economics, is one of the panel who thinks it will be a longer wait for reduced rates.
"We expect the Bank of Canada will hold the policy rate steady at 4.5% through 2023, before gradually easing rates to a neutral level beginning sometime in early 2024,” he said. “The BoC has now "conditionally paused" hiking the policy rate as it assesses the impact of past rate increases on the economy…The Governing Council will require a build-up of evidence before potentially hiking rates rather than act on one or two data points such as January's 150,000 job surge or December's robust advance in retail trade.”
Among the downsides to the current level of rates, the panel is expecting a rise in unemployment – to 5% by the end of 2023 – and increased insolvencies among homeowners grappling with far higher mortgage rates than they had anticipated a year or so ago.