Households will likely have to wait several more months before the surge in prices at the pump and at the grocery store moderates, warns Desjardins Group chief economist Jimmy Jean.
Posted yesterday at 4:58 p.m.
Desjardins Group anticipates that the inflation rate in Quebec will be around 6% in 2022, but could drop to 2.2% in 2023. “In our scenario, we have a slowdown in the economy and a slowdown in the he economy is causing inflation to moderate,” he explained in an interview on Tuesday on the sidelines of a virtual conference where he discussed his team’s economic forecasts.
The tightening of monetary policy by central banks in Canada and the United States should help curb the economic overheating that generates inflation, according to the economist. He also anticipates an improvement in the supply chain and hopes for a reduction in geopolitical tensions in Ukraine.
The moderation of inflation does not mean that prices would return to where they were, he qualifies. “It still means that prices continue to rise, but that they continue to rise more slowly. »
To control inflation, the Bank of Canada began raising its key rate in March. The rate, which had been at 0.25% for 22 months, has since been raised twice to stand at 1%. The next decision of the central bank will take place on 1er June.
Mr. Jean predicts that the key rate could rise to 2.25% by the end of the year. He anticipates that the key rate could remain stable in 2023. His team even forecasts a rate of 2% at the end of 2023.
An effect on mortgage rates
The effect is being felt on mortgage rates, which have risen in recent months. “Inflation risks remain on the upside, if our tolerance for upside is a little lower, it might be better to go fixed right now,” he said during his virtual presentation.
On its site, the mortgage broker Multi-Prêts posted, Tuesday, a five-year fixed rate of 4.14% and a variable rate of 2.25%.
Consolation for households renewing their mortgages in the coming months, the five-year fixed rate may have already come a good part of the way it was supposed to. “The bulk of the rate increase took place with regard to the fixed rate, predicted Mr. Jean in an interview. The variable rate will continue to rise because of monetary policy. »
The five-year fixed mortgage rate is influenced by five-year bond rates, which are influenced not only by the Bank of Canada, but also by investors’ expectations of future rates. “While variable rates are more influenced by current rates,” he says.
The fixed mortgage rate therefore takes into account the economic forecasts of the market. “We need more surprises on inflation [pour que les taux fixes connaissent une forte hausse]. »
The specter of a recession
By trying to control inflation, central banks run the risk of causing a recession. For the moment, Mr Jean anticipates a soft landing, but admits that it is a risk.
Its forecast calls for real gross domestic product (GDP) growth of 3.5% in 2022, then a slower progression to 1.3% in 2023.
When asked if central banks have managed to make the economy a soft landing in the past, Mr. Jean lets out a laugh. “It’s been seen before, but of the last 11 tightening cycles, eight have ended in recession and only three where a soft landing has been successful. »
We must be careful before drawing the conclusion that a recession is inevitable, he adds. “Classic” economic models do not point to a recession in the next 12 months, but it is not impossible that this scenario will materialize on a more distant horizon due to the increase in interest rates, adds – he
Mr. Jean points out that there are several different factors compared to previous cycles where central banks have tried to control inflation. He notes that households have more savings coming out of the pandemic. Corporate profit margins are under pressure due to inflation, but they are falling from a high threshold. “That’s why I don’t take a firm position on it. [sur la possibilité qu’il y ait ou non récession], because there are a lot of moving parts. »