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  • Steve Huebl

2023 Housing and Interest Rate Forecasts

The good news is that interest rates likely won’t be going up much, if at all, in 2023. The bad news? Don’t count on them coming down any time soon, either. After a year in which the Bank of Canada raised its key overnight lending rate seven times in an attempt to slow down soaring inflation, most experts believe the Bank is set to take a breather in 2023. That means the interest rates Canadians are paying on everything from mortgages to lines of credit probably won’t be going up much, but aren’t about to drop. There are already signs the economy is slowing down and hitting consumer demand, which will push inflation lower, argues Pedro Antunes, chief economist for the Conference Board of Canada. And the full effect of the series of hikes still hasn’t been felt, said Antunes, meaning there’s more of a slowdown coming. “It takes a while for these increases to be baked into the economy,” said Antunes. “There’s some evidence that the Bank of Canada’s rate increases are starting to work, because consumer demand is dropping. I’d like to see the Bank pause the increases.” The Bank has raised its key overnight lending rate seven times this year, most recently bumping it by 50 basis points (half a percentage point) to 4.25 per cent in early December. The overnight rate began the year at 0.25 per cent, where it had been since the Bank dropped it three times in one month in March 2020, as the global COVID-19 pandemic was declared. The theory is that by making it more expensive for Canadian consumers and businesses to borrow money, the Bank will cut demand and slow the economy down, pushing prices lower. The Bank of Canada has said it’s trying to get the annual rate of inflation back down to a target range of one to three per cent. In November, it was at 6.8 per cent. “Core” inflation, with food and energy stripped out, was at 5.4 per cent. That, said Antunes, means rate cuts are probably a year or so away. “Until the core rate starts to get to three per cent or lower, I don’t see the Bank lowering rates. We don’t see that happening until the fourth quarter of 2023,” said Antunes. Banks typically move their prime rate — the interest rate charged to their very best customers — in response to Bank of Canada moves.

The prime rate, in turn, is used as the starting point for determining interest rates charged for mortgages and lines of credit. Most forecasters are calling for the Bank of Canada to keep its overnight rate at 4.25 per cent for all of next year. Raising it again could deepen a potential recession. “Pausing interest rate hikes won’t prevent a Canadian recession in the year ahead. A mild downturn is probably already a given in light of the current restrictive level of interest rates,” said a recent report from the economics department at RBC.

RBC predicts the overnight rate will stay put at 4.25 for all of 2023, and will start to fall in early 2024. The seven hikes from 2022 are still working their way through the economy. “The residual impact from higher interest rates will continue to ripple through (as fixed rates mortgages are renewed for instance). This will soften consumer spending in the quarters ahead,” said the RBC economics report. The rate increases already in place will be taking a big enough bite out of household spending to slow the economy down substantially, RBC argued. “The share of household disposable income eaten up by debt payments will spike higher, to record levels, by the end of next year. Higher household debt payments and inflation are expected to subtract an additional $3,000 from purchasing power per-household in 2023,” RBC wrote. After raising its overnight rate by 50 basis points to 4.25 per cent in early December, the Bank of Canada issued a statement which many analysts interpreted to mean there’d be a pause in its rate-raising campaign. Many pointed to the Bank’s admission that Canadian economic growth has already ground to a halt. Still, points out Arlene Kish, director of Canadian economics at S&P Market Intelligence, there’s still plenty of evidence to suggest that inflation, the Bank’s stated priority, hasn’t been tamed just yet. Kish predicts the overnight rate will increase by another 50 basis points, or half a percentage point, by spring, bringing it to 4.75 per cent. “The acceleration in core prices is not what central bankers were expecting, given the previous large interest rate hikes. Although the governing council signalled the end of restrictive monetary policy is near in the

December policy announcement, it is not over,” Kish wrote in a recent research note. And there are always the Bank’s own words towards the end of its recent December rate increase announcement. “We are resolute in our commitment to achieving the two-per-cent inflation target and restoring price stability for Canadians,” the Bank wrote.

Steve Huebl Real Estate December 29, 2022


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