The Canadian real estate market is forecast to be busy next Spring, but a hurdle just appeared. RBC Economics updated its forecast for the Bank of Canada (BoC) overnight rate in 2022. Canada’s largest bank sees inflation forcing the BoC to hike rates in April. In just five months, this would increase mortgage rates at the beginning of the Spring market. If this occurs, it’s likely to dampen expectations (and budgets) before the busiest sales period in the year.
Canada’s Biggest Bank Sees Interest Rates Rising In Q2 2022
Canada’s largest bank has forecast three hikes to the overnight rate by April. The first hike is forecast for Q2 2022, followed by one per quarter after. This would put Canada’s overnight rate at 4x the current level by the end of next year. If it sounds early, this is the earliest the BoC said they would hike rates. If it sounds overly ambitious, the market has priced in 4 to 5 hikes. It’s actually a surprisingly conservative forecast.
Inflation Is Forcing The Rate Hike and Employment Supports It
The BoC appears to be put into a corner on inflation, a problem unique to Canada and the US. The BoC claimed elevated inflation was transitory, but now sees it as more persistent. In October, they ended the use of quantitative ease (QE), a program designed to grow inflation. They’re still not sure where the inflation is coming from though.
Those doubting hikes point to weak gross domestic product (GDP) growth. Stat Can’s preliminary flash estimate for growth was flat at the last reading. Not the end of the world, but not exactly a data point that screams “rate hike.” RBC sees this as a small issue unlikely to impact the trajectory.
“The BoC seems to be putting more stock in strong employment data than soft GDP readings, and brought forward its estimate for when economic slack will be absorbed next year,” said Josh Nye, one of the bank’s senior economists. “That opens the door to an earlier rate hike and we now expect three rate increases next year beginning in April.”
In The Middle of The Spring Market?
If you’re in the real estate industry, the first hike occurring in April might have piqued your interest. April is traditionally the beginning of the Spring market, the busiest period in the year. Since the overnight rate impacts mortgage rates, this can throttle demand. At this point, a slower market might not be a totally bad thing.
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