One of Canada’s “Big Six” banks is declaring next year to be “The Year of The Hike.” National Bank of Canada (NBC) chief strategist (and poet-in-residence) Warren Lovely is calling the first interest rate hike in just a few months. He sees the Bank of Canada (BoC) making its hike in March, way ahead of schedule. Over the next year, the overnight rate is forecast to recoup much of the ground lost during the pandemic. However, Canada’s real estate bubble will prevent it from going much further. Since the country went all-in on housing, it can’t pursue more aggressive policies like healthier economies.
The Bank of Canada Will Hike Rates In March
Canada is expected to wind up its overly easy monetary policy pretty fast. Next year, National Bank sees five full, 0.25 basis point (bp) hikes. The first will be in March, bringing the overnight rate to 0.50% about a month before the BoC forecast. The only other institution to call a hike that early is BMO. However, mounting inflation pressures might force others to adjust in the coming weeks.
The remaining four hikes to the BoC’s overnight rate are forecast throughout the year. The second and fourth quarters are expected to see one full 0.25 bp hike each. In the third quarter, they see two full hikes. Canadians should see the overnight rate at 1.50% in one year, 6x the current level. That’s going to be a significant change.
Canada’s Real Estate Bubble Will Prevent Rates From Rising Too Fast
In 2023, they don’t see much more happening due to Canada’s real estate bubble. The bank only sees one more rate hike, topping out the country at 1.75% — the lower bound for the neutral rate. A neutral rate is the level of interest where money is cheap enough to support full employment but high enough to control inflation. According to the BoC’s last estimate, the neutral rate for Canada is between 1.75% to 2.75%.
The reason NBC only sees the rate rising to the lower bound is “interest-sensitive demand in the economy.” It’s a friendly way of calling out Canada’s real estate bubble, which is now so big it weighs policy decisions. “We don’t see the BoC as wanting to crush one of the main drivers of Canadian economic activity,” said Warren.
National Bank sees interest rates rising earlier than most other forecasts but ending faster. For example, Scotiabank sees interest rates climbing in the second half of next year. However, they also see rates rising closer to the middle of the neutral range, ending hikes around 2.25% in 2023. A slower start but higher rise compared to the NBC forecast.
While National Bank’s forecast is lower, it’s higher than the current rate, and that’s going to throttle credit. The forecast is the same level before the recession began, which had slowed home sales. It wasn’t until the end of 2019 when the BoC began providing mortgage liquidity injections, that the market picked up.
100 basis points is 1%, 0.25 basis is nothing.
The real estate bubble doesn’t govern the rates, it a result of them. Low rates and QE infinity has all but made certain that inflation will be sustained and rampant (shocker). A deflating, if not outright collapsing, housing bubble will not be sufficient rationale to keep rates low when consumer price inflation is holding 10%. Not a chance. The poor may not own anything but they still have more votes. They will have no choice but to raise rates higher. And that is totally aside from the matter that defaults will be on the rise. When young people are levered to the max they can’t afford both and extra $400/month food bill and their overpriced/speculative domocile.
Reminder: stock up on popcorn.
I have large sums of liquid investments on the side(not invested in the Canadian markets) waiting to mobilize once our real estate market goes belly up which I predict will be within 3-5 years.
I have been preparing the last couple of years for this, and if anything, our central bank intervention has only sped up the inevitable occurrence of a crash of epic proportions – as people effectively took the time to blow their brains out with debt during this pandemic with negative productivity growth in the economy.
You can bet your bottom dollar I have my bowl of popcorn ready.
Hike to 1.75% interest rate… But fake inflation is already > 4%… Are we just hoping the inflation will go away by itself? Everyone these days can really talk the talk, but when it comes to walking, most will be walking…. back that is… (like ECBs “temporary” bond buying increases….).
That’s true, but as the article mentions that National Bank believes 5 hikes (@.25 each) will end up with 1.25% higher than current rates – by the end of 2022.
This is clearly speculation on their part – but what is not speculation is what trouble thousands of Canadians will do with the water line rising by 1.25% more in 12 months.
Living for today and thinking about tomorrow the following day will lead to trouble beginning tonight. 💡