Interest rate hikes are coming to an end, but Canadians and Quebecers will have to wait at least another year before seeing them come back down and prepare themselves, by then, to face a “mild” recession.
In an update of Desjardins Group’s economic forecasts on Tuesday, the institution’s vice-president and chief economist, Jimmy Jean, painted a portrait of an economic situation put under pressure by inflation that the central banks of all the countries are trying at all costs to curb it by raising key rates.
One last shot in October
Canada, he says, will somehow benefit from its high debt ratio. “We need less monetary tightening in Canada to operate the same slowdown as in other countries where this debt ratio is lower.” Yet, he adds, “the Bank of Canada is among the most aggressively raising interest rate central banks in the world.” However, he believes that we are coming to the end of the cycle. “We expect there to be another interest rate hike in October, of 50 basis points, but that it ends afterwards because otherwise, we risk (…) worsening the situation. recession.”
On the other hand, we should not expect a short-term respite, but rather that we are experiencing “a landing that is more painful than smooth. We thought it would be possible to make a soft landing, but this is less the case at the moment. Because yes, he says, Canada is going into recession: “2023 ends in a recession, a mild recession”, he specifies, but a recession all the same.
And he explains that this situation is not a source of concern in itself for a central bank, because the mission of such an institution is first to curb inflation before it becomes a spiral of wage increases and price growth. “The role of the central bank, its mandate, is not to prevent recessions. In fact, one could even argue that if a recession is the necessary passage for it to succeed in meeting its 2% (inflation) mandate, it is ready to live with this situation.
Responsible Governments
At the same time, he says, “the Bank of Canada must not push the bill” and for that, governments must help it by acting “responsibly”.
A warning to that effect came just this week from the UK, where it decided to grant major tax breaks. The move not only sent markets and the currency tumbling, but the Bank of England’s chief economist warned that it is likely to tighten further, which could deepen the recession.
But if the Bank of Canada, as he foresees, stops raising its key rate after a final blow in October, how is it that it will be necessary to wait a year before it starts to reduce it and to see interest rates follow? “The start of the rate cut should be at the end of 2023”, insists Jimmy Jean, even if we expect to see signs of a decline in inflation from the start of next year.
“In normal times, you would have thought that, at the first signs of weakening (in inflation), the central banks would start to give a little respite. However, this is not what we are likely to see because the central banks have been burned by what has happened in terms of inflation and inflation expectations (which have been undervalued) . They’re going to want to do more than less, which is to keep rates higher, longer.”
According to Desjardins forecasts, inflation should be brought under more certain control towards the end of 2023. -there we will start lowering rates.
Mr. Jean warns, however, that we are not likely to review the levels of 0.25% that we have seen in recent years, but rather key rates of 2% or 2.5%.
Variable rates soon more attractive
It is also because of this delay of about a year between the end of the key rate hikes and the start of the cuts that the economist does not believe that there will be any respite for home buyers in the immediately, despite the correction that we see in the real estate market. The forecast of an average drop of 24% in prices in Canada and 17% in Quebec still holds, according to him. But the constant increase in the cost of mortgage loans completely cancels out this gain in affordability.
On the other hand, if he expects the central banks to put their key rates on hold and freeze while waiting to see inflation clearly brought under control, “the markets, for their part, risk integrating into their internal structure possible rate cuts, which will mean that, for example, at the level of five-year rates, we risk seeing rates decrease”. He also expects, from this perspective, to see variable rates follow this trend and he concludes that, in an environment where rate cuts are foreseeable, the choice of a variable rate “seems to me justified”, he says. , without wishing to seek advice on the matter.