Everyone remembers this sentence from the Bank of Canada’s press release published on Wednesday: “Going forward, the Governing Council will assess whether it is necessary to raise the policy rate further to bring supply and demand back into balance and inflation to the target. Last October, the Bank of Canada wrote: “The Governing Council expects the key rate to rise further”. The nuance in the tone is palpable. And the central bank reiterated insistently that quantitative tightening is a complementary tool to key rate hikes. That this offloading of its balance sheet swelled by the purchases of government bonds during the pandemic plays the effect of a rise in interest rates along the yield curve, depending on the maturity of the securities sold.
In short, if, according to all evidence, December 7 coincides with the reaching of a peak in the current upward cycle, i.e. a key rate of 4.25%, monetary austerity will have been biting, with an increase 400 basis points of the target overnight rate in 10 months. Far in the restrictive zone beyond the so-called neutral rate, included in the range of 2-3%.
For variable rate or renewal mortgage borrowers, do the math. Simply by way of an order of magnitude, we note that each 25 basis point increase in the mortgage rate adds to the payment a little more than $6 per month for each $50,000 of loan.
Signs of braking
Referring to stronger-than-expected GDP growth in the third quarter, the Bank of Canada notes that behind the strength displayed by commodity exports, there are signs of a slowdown in domestic demand. Thus, “measures of core inflation remain around 5%. Their three-month rates of change have declined, however, an early sign that price pressures may be easing,” she writes, while restating firmly her determination to “achieve the inflation target of 2 % and restore price stability.
As for the economic slowdown, it thus sticks to its projections formulated in its Monetary Policy Report that economic growth ” will essentially stagnate through the end of the year and into the first half of 2023 ». The Bank of Canada has not written it, but it does not rule out a recession scenario. She sees GDP growth ranging between 0% and 0.5% through the end of 2022 and the first half of 2023. slightly below zero than slightly positive,” reads its October report.
Oxford Economics believes that the Canadian economy is already in recession and sees a 2.3% fall in peak-to-trough GDP by the third quarter of 2023. For his part, Marc Desormeaux, chief economist Desjardins Group, instead predicts that growth in the fourth quarter of 2022 will be almost twice that central bank projection. “But it also likely means a more pronounced slowdown in 2023 rather than ‘virtually stagnant’ growth in the first half of next year to restore the balance between supply and demand. He believes it will be even more difficult for interest-rate-sensitive sectors next year, “as the Canadian economy has not yet taken the full shock of rising interest rates this year.” .
So nothing too good for housing affordability either until the central bank begins to ease its key rate, expected in the second half of next year at best, or even late 2023, early 2024. , according to the dominant scenario. Depending on whether the ongoing housing correction is 15% or 30% from peak to trough, the average price will remain 5% to 27% higher than its pre-pandemic level, combined with a monthly mortgage payment showing at the end of the third quarter up nearly 20% in Montreal year-on-year and nearly 10% in Quebec City, according to calculations taken from National Bank data.