The Bank of Canada, in its latest announcement, left its policy rate unchanged, signaling a probable end to its rate-hiking path. This decision, influenced by cooling inflation, rising unemployment, and an anticipated economic contraction, was described as “relatively dovish” by Benjamin Tal. He indicated that while the Bank maintained the rhetoric of potential rate hikes, it was more a strategy to moderate market reactions and consumer expectations than a sign of future increases​​.

Despite the pause in rate hikes, the Bank remains wary of inflation risks. Tal interpreted this as a message to the public that their efforts to lower the Consumer Price Index (CPI) were not yet complete. He noted the Bank’s delicate balance in managing long-term rates, suggesting that any premature declaration of victory over inflation could lead to an undesirable drop in these rates​​​​.

Economic and Housing Market Challenges Ahead

With rates held steady for three successive decisions, Tal forecasted a challenging environment for the housing and mortgage sectors in the coming months. He anticipated an increase in housing supply and a decrease in sales, leading to a buyers’ market with limited buying activity. This situation, according to Tal, will take several months to stabilize​​.

Highlighting the housing market’s vulnerability, Tal compared the current scenario to the 1991 recession. While not as severe, he warned of downward pressure on prices, especially in the condo market, where supply is increasing​​.

The spike in interest rates over the past 20 months has significantly increased renewal costs for Canadian borrowers. Tal emphasized the importance of the Bank starting to lower rates in 2024 to manage these impacts and avoid a rapid increase in delinquency rates. He anticipated a manageable shock if the Bank begins cutting rates in 2024 and continues into 2025​​.

Looking Ahead: A Muted 2024 Economy

Tal projected a “semi-recessionary” pace for the Canadian economy in 2024. He observed decreased consumer spending and investment, with the housing market already in a recession-like state. However, he anticipated an improvement in the latter half of the year. Signs of normalization in the labor market, such as a reduction in job vacancies and stabilization of the unemployment rate, were seen as positive indicators​​.

The Influence of US Federal Reserve Decisions

The US Federal Reserve’s monetary policy significantly influences the Canadian economy. Recent adjustments in traders’ expectations for Fed rate cuts in 2024, following an inflation report, indicate a cautious approach to monetary easing. This cautiousness may reflect in the Bank of Canada’s future decisions, as both economies are closely interconnected and a differential between the two country’s rates impacts the exchange rate. If the US fed has rates higher than Canada, it weakens the Canadian Dollar which is also an inflationary influence since we import so many goods and the US Dollar is the international currency.

In conclusion, while the Bank of Canada’s rate hikes seem to be at a pause, the path ahead is fraught with economic challenges, particularly in the housing market. The central bank’s maneuvers will be crucial in managing these challenges while keeping an eye on inflation and global economic trends, particularly those influenced by the US Federal Reserve.