America’s largest bank is making a bold call for Canada’s central bank — it will raise rates within days. JP Morgan (JPM) economist Silvana Dimino shared their forecast for Canadian interest rates. JPM sees the Bank of Canada (BoC) hiking the overnight rate five times in 2022, sending it 500% higher. Most surprising is how soon they see this starting — by the end of this month.
The Bank of Canada Will Raise Rates This Month
JP Morgan sees the BoC raising interest rates faster than previously thought. They’re calling one full hike at the January 26th monetary policy meeting. “We now expect the Bank will hike the policy rate 25bp at the next meeting on Jan 26, earlier than implied by the Bank’s current forward guidance and earlier than our prior April 2022 forecast,” wrote Dimino to clients.
The Overnight Rate Will Rise 500% This Year
The banking behemoth sees Canada raising interest rates five times this year. One per monetary policy report, as well as an additional hike in June 2022. The BoC overnight rate will be 1.50% by the end of the year if it goes to plan. It’s the same year end as the National Bank of Canada’s estimate we shared yesterday.
Canada’s Economic Recovery Has Been “Remarkable”
Strong employment and inflation are the primary reasons their forecast has accelerated. The bank points to Canada having 250,000 more employed people than pre-pandemic; the participation rate has recovered; and unemployment is near Feb 2020 levels. “The recovery and continued growth in the labor market after the severe provincial lockdowns of last spring has been nothing short of remarkable,” Domino says.
JPM thinks the BoC still believes inflation pressures will ease later in the year. At the same time, higher employment and wage growth will support elevated inflation. “… the risks that inflation will be more persistent than perceived earlier in the pandemic have grown materially.”
It’s important to understand higher interest rates are a sign of a strong economy. As the economy improves, they should be rising. This is part of the reason most of Canada’s large banks are saying it’s reckless to keep rates this low. Some think they should have begun hiking a year ago. The last time the overnight rate began to climb in 2017, macro indicators weren’t this impressive.
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Now that residential real estate has been financialized and considering how far out valuations are, we may be surprised at how fragile and sensitive Canadian real estate has become.
A very large number of dwellings are now investor-owned (rather than end-user owned) and they own for two reasons only – expected appreciation and steady fixed cash flow – and both are linked to valuation/price. If an initial price decline occurs and a new trend downward appears imminent, many owners of investor-owned dwellings would be very motivated to sell (and may move quick).
Pile other potential sellers/holdouts on top of that – retirees or near-retirees looking for top dollar; those who bought too much house in the last few years and worried about being underwater; possible casualties if a recession ensues; etc. – and there could be quite a waterfall of new listings.
Suddenly, we’ll see that supply was never the issue! It was house hoarding & holding out (caused by policies that produced a ‘never can lose’ market psychology) that lead to ever lower turnover. Turnover is the issue – everyone wants to hold onto the golden goose…until it becomes rotten.
At the same time, a larger than normal amount of future local end-user demand was pulled forward due to FOMO.
With new listings growing (and actual supply growing at a significant clip), investor demand waning, and local end-user demand diminished by being pulled forward, prices will likely continue to erode. Any interested buyers are likely to ‘stand back’ as prices drop to find their new fair equilibrium that is better supported by fundamentals.
In all this, a persistent level of consumer inflation will likely impede the usual options of “massive fiscal injections” or “dropping rates to .25%”, especially if the rest of the world is still in okay shape.
Never before in the history of humankind has a bubble continued indefinitely. This time will be no different. Eventually, these sorts of imbalances can’t be continued and the elastic will snap back. The big question is – when might this happen??
They’ll likely just introduce policy that permits private equity to buy and hold residential property which will back stop the market. Look down south to see what’s happening with BlackRock buying up real estate like crazy. Also, not sure if ya’ll remember there was a media drip in the globe and mail months ago regarding how some developer wanted to buy up 1 billion worth of houses in the GTA? That wasn’t by accident. It was likely to gauge public opinion which did not go well. I’m sure that once the sky starts falling the reaction will change very quickly to positive once private equity steps in to save the market from imploding. Lol
Some markets in Canada are truly supply constrained. ie. You won’t find a property for sale that meet your condition in the entire city at any price at this time of the year.
Those markets may be less prone to the potential downswing than others.
The government gets gold stars in how to destroy a nation. It is using their cooked up never ending pandemic to bankrupt Canada. If they make this move, there is no doubt in my mind that they are looking for a recession comparing to the fiasco of the early 1980’s.
The issue I have with these never-ending forecasts is how all of these governments are going to pay the double, triple of quintuple interest rate costs? Our feds are already paying, what almost 12B in annual interest on the 1.2T debt? Every interest percentage will add another 12B just to the interest portion. Can we print money that fast?
Of course they can. The BoC can print as many CAD as they want. They just can’t print foreign currency. So the question becomes how much debit does Canada have denominated in anything not CAD.
This is what kills me, the BoC has fully embraced the reality that deficits do not matter and the federal debt can also be financed, great! However they have now reached the tricky part of MMT where they are supposed to react to inflation by increasing taxes and raising interest rates. Theoretically there is no issue in disregarding debt/deficits but in doing so you are required to respond when inflation surges, which there is no political will to do. Have your cake and eat it too, is the Canadian political system ethos. And this is not a Liberal, Conservative, NDP bash at all, when the majority of your citizens (60%) and most influential citizens (wealthy) are on board with ever increasing asset prices politicians will respond to incentives – as anyone does.
When you embrace the reality that federal deficits are irrelevant you also have to embrace the fact that monetary policy is not the sole answer to economic ills. Raising interest rates will discourage excess borrowing in the private sector but the economy has misallocated capital to such an extent that additional fiscal policies are needed to help correct this. Capping the primary residence capital gains tax at $500,000, implementing a federal property tax – offset by an income tax reduction, banning all short term rentals, etc. Do something other than build 74 townhomes in Waterloo for the love of God.
The country is in need desperate need of leadership and someone who can look beyond the 2-4 year election cycle. My hopes are not high and I am trying my damndest to get out of this country before it is too late.
@ Cody. Yup. In MMT the excess capital is supposed to be taxed back, but they’re too afraid to execute it. Now they’ve poorly executed traditional and experimental economics.
A less sensational way to describe a “500% increase”, is an increase from 0.25% to 1.5%, which is still too low to combat inflation.
Two words to five words because you can’t objectively read something without it triggering emotions?
I believe since they’re quoting JPM institutional research, this is for people looking to understand bond sensitivity. We don’t need snowflake math in finance, we need the fewest words possible to prevent an error or misread.
I am firmly believe that the Candian Housing market will go up further by 10 % this year because of no supply and higher demand of housing and it is going to continue for the future because if incoming immigrants 320,000/year. there is no chance of bubble happening in this market because 1980, canadian population is much less than today and it is increasing by 1/3 million a year
You can believe it goes up a million percent. There’s going to be 10% less money for them to buy it with though, LOL. Good luck finding 20% more money .
1.5% is nothing, back to pre-rona when rates should have rised well over 1.5%. Rates should be a minimum of 7% to fight inflation.
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