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Bank Of Canada Expected To Hike Rates Sooner Than Planned, May Cool Housing

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Canadian real estate buyers may get a little psychological shock later this week. The Bank of Canada (BoC) will update the public on monetary policy next Wednesday. Three Big Six banks said they expect the central bank to discuss higher rates. Two of those, expect a discussion on rate hikes happening earlier than stated. All three see the BoC trying to cool the exuberant expectations they set for loose policy.

RBC Sees Recovery Plan And Interest Rate Hikes Accelerating

RBC economists Nathan Janzen and Rannella Billy-Ochieng see rate hikes sooner than most. The economy is recovering at a much faster pace than the BoC had anticipated just four months ago. In January the central bank had forecast a 2.5% annual rate contraction for Q1 GDP. The quarter’s final number showed 6% annualized growth — way above expectations. 

The whole recovery timeline may speed up, according to the economists. “The latest Bank forecast assumed this will happen in 2023, about a year later than our own view of early 2022,” they said. This will cool off asset purchases further, and tighten the overall credit environment. “We continue to expect the first interest rate hike will come earlier than the central bank has been flagging, but still not until the second half of next year.”

BMO Sees The Bank Of Canada Dampening Home Sale Expectations

BMO macro strategist Benjamin Reitzes is expecting some housing cooling statements next week. He said, “it’s no coincidence that housing is on fire while rates are at or near record lows.” Adding, “a signal from the BoC to the public that rates will eventually go higher, could help dampen the extreme exuberance currently in the market.”

Though he sees the BoC announcing a taper and setting expectations, he sees little else. Moving the 2023 guidance to 2022 would be unlikely. “Given the current uncertainty those outcomes seem unlikely,” he said. Despite the optimism, “persistently high uncertainty will keep the policymakers cautious for now.” 

National Bank Of Canada Sees The Potential For Rate Hikes To Accelerate

National Bank of Canada (NBC) chief analyst Jocelyn Paquet thinks rates may hike early. She said nothing housing specific but sees QE tapering and guidance revised higher. The upward revision of guidance would lead to credit tightening. 

She said, “we’re likely to see a change to the Bank’s forward guidance on the policy rate which is currently predicated on slack being absorbed in 2023. Expecting the impact to either guide earlier, like RBC suggested, or “change in the structure of its forward guidance to afford the Bank more flexibility on adjusting the overnight target over the next couple years.” 

There’s still a lot of uncertainty in the economy, but generally, it’s better than expected. The uncertainty lowers the chance of any near-term tightening. The BoC however is at fault for setting off a home-buying spree with their statements. It would be surprising to not see the central bank try to walk them back. 

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