Prepare Yourself: “We Are Not There Yet”
Tiff Macklem, Governor of the Bank of Canada told the Senate committee on banking, commerce and the economy “This tightening phase will draw to a close. We are getting closer, but we are not there yet.”
While he recognized the strain Canadian households are facing – particularly those with significant debt loads – Macklem went on to say that higher interest rates are necessary in the short term in order to restore price stability and sustained economic growth. Ouch! “We don’t want this transition to be more difficult than it has to be,” he said. The latest rate hike (announced late in October) of 50 basis points means the Bank of Canada has raised its overnight target rate by 350 basis points since March. Double ouch!
Interest Rates
Macklem described the Canadian economy as “overheated” but added that increases in interest rates are beginning to show a moderating impact on growth. Sectors of the economy most sensitive to interest rate hikes include housing and big ticket spending. “But, the effects of higher rates will take time to spread through the economy,” Macklem said. “There are no easy outs to restoring price stability. We need the economy to slow down to re-balance demand and supply and relieve price pressures.”
Inflation
Macklem also reaffirmed, “The Bank of Canada’s job is to ensure inflation is low, stable and predictable. We are still far from that goal. We view the risks around our forecast for inflation to be reasonably balanced. But with inflation so far above our target, we are particularly concerned about the upside risks.” There is still work to do in order to bring inflation back to its target of 2%. The Bank expects headline inflation to average 6.9% in 2022 before falling to 4.1% in 2023 and 2.2% in 2024.
Forecast
The Bank of Canada predicts a slowdown in economic growth in the coming quarters, with GDP averaging 3.3% for all of 2022, just 0.9% in 2023, and increasing by up to 2% by 2024. “We expect growth will stall in the next few quarters—in other words, growth will be close to zero,” Macklem stated.
A Balancing Act
Macklem also described the bank’s challenge of trying to balance the risks of both under- and over-tightening.
“If we don’t do enough, Canadians will continue to endure the hardship of high inflation. And they will come to expect persistently high inflation, which will require much higher interest rates and, potentially, a severe recession to control inflation. Nobody wants that,” he said.
“If we do too much, we could slow the economy more than needed. And we know that has harmful consequences for people’s ability to service their debts, for their jobs and for their businesses.”
What Can You Do?
- Learn everything you can to understand the role that interest rates have on growth and inflation, and make them part of your decision making process.
- Stay up to date on the latest news including mortgage financing rates and future forecasts.
- Work with mortgage professionals (like me) when you’re contemplating a change or move.
