Bank of Canada Interest Rate Forecast Report March 2023 | Finder Canada (2023)

Finder Bank of Canada: Rate forecast report

Canada interest rate forecast for the March 8 decision

Key findings

• • 88% — Of economists predicted a hold to the BoC overnight rate on March 8, 2023
  • 12% — Predicted a rate hike of 0.25%
  • 75% — Of experts believe the Bank was right to hold the rate
  • 64% — Believe inflation won’t reach the target 1% to 3% range until 2024 or later
  • 6% — Predicted unemployment rate by 2023 (from 5% to 6%)
  • 88% — Nearly all experts predicted a decline in real estate prices. Most believe prices will drop another 10% by end of 2023 (compared to Jan 2023 prices).
  • 100% — Believe insolvencies will keep rising in 2023, particularly among homeowners

The March 8, 2023 BoC decision

The Bank of Canada's rapid rise in the overnight rate appears to finally lost its steam — almost a year to the day when the central bank first began raising interest rates in the hope of curbing inflation - they have now paused. For the first time, in the current rate hiking cycle, an overwhelming majority of Finder's economic and industry experts (88%) correctly predicted the BoC would hold the interest rate on Wednesday March 8, 2023 — holding the overnight rate steady at at 4.5%.

The consensus by these experts is that the BoC will hold this rate for most of 2023. Even with this pause in climbing rates, compared to a decade of historically low rates, the impact of the BoC's elevated overnight rate will continue to pressure heavily indebted Canadians, some of whom may face insolvencies due to the inability to carry large loans — including mortgages.

While most experts forecasted no change to the rate, 12% thought the Bank would have implemented another 25 basis point increase.

Why an interest rate hold now?

While most experts (88%) believe the bank would hold the rate, nearly as many (75%) agree the rate should have held to allow the impact of last year's rate hikes to continue to be felt, without putting further strain on indebted Canadians by continuing to increase.

Taylor Schleich, strategist for the National Bank of Canada, says a hold was in order as, "There are signs that rate hikes to date have been sufficient to cool the economy and bring inflation down."

Avery Shenfield, chief economist for CIBC, agrees, further explaining, "The economy is likely to slow in subsequent quarters without further hikes, due to the lagged impacts of prior rate increases."

Tony Stillo, director of economics for Canada, believes, "The Canadian economy is very sensitive to interest rates because of elevated household debt and overvalued housing, and is likely already in the early stages of an emerging recession."

Advocating for caution is Murshed Chowdhury, associate professor at the University of New Brunswick:

"Although inflation remains high, the bank must assess the efficacy of its current tightening policy. Additionally, increasing rates further could pose a significant risk to economic growth and potentially trigger a recession. The latest GDP figures indicate that the economy didn't expand in the recent quarter, which warrants the bank to exercise greater caution."

However, Philip Cross, senior fellow at Macdonald-Laurier Institute, holds a contrary view. He believes rates should [have] increased by another 50 basis points, because there is "no sign of weakness in labour markets in North America, while inflation continues to pick up in Europe. This raises the risk of above-target inflation becoming embedded in our economy."

When will the Bank of Canada pivot to lower rates?

While many wish for a return to historically low-interest rates, patience may be in order as Governor Macklem, and the BoC appear inclined to hold the overnight rate steady for the foreseeable future.

Only a few Finder experts believed the BoC would consider additional rate increases in 2023. Only one anticipated a need for an increase to the overnight rate in April 2023, while one expert suspects a potential rate decrease in September 2023. It's not until October 2023, when a minority of Finder experts (13%) believe the BoC will start to reduce overnight rates, prompting reductions in interest rates, across the country.

As Director of Canada Economics, Stillo anticipates the BoC to hold steady in 2023, with rate reductions coming in 2024. Stillo also suggests that the BoC will not consider a rate increase unless there is overwhelming economic evidence of a heated economy.

"We expect the Bank of Canada will hold the policy rate steady at 4.5% through 2023, before gradually easing rates to a neutral level beginning sometime in early 2024. The BoC has now "conditionally paused" hiking the policy rate as it assesses the impact of past rate increases on the economy…The Governing Council will require a build-up of evidence before potentially hiking rates rather than act on one or two data points such as January's 150,000 job surge or December's robust advance in retail trade."

When will inflation be tamed?

The Bank increased rates quickly and consistently in order to fight inflation, which impacted cash-strapped Canadians over the last year.

With inflation still close to 6%, most of the Finder expert panel (64%) do not anticipate that the BoC's target inflation rate — between 1% and 3% — will be reached until 2024 or later.

Most panellists, including Charles St-Arnaud, chief economist for Alberta Central, maintain that "inflation is likely to remain sticky," which is why reaching the target overnight rate won't be achieved until next year, or later.

Moshe Lander, senior economics lecturer at Concordia University, explains a possible timeline to bring down inflation:

"The biggest interest rate increases occurred in mid-2022. If it takes around 18 months for these interest rate increases to have maximum impact, then the effect of those moves should occur in late 2023. If inflation rates come down around 0.25% per month, then inflation will hit the upper band of the Bank's target range in early 2024."

Will unemployment impact rate hikes?

The unemployment rate held relatively steady at 5% in January 2023. Still, economic headwinds like persistent inflation dampening consumer spending coupled with recent news around job losses have experts wondering if the picture can remain rosy all year if Canada's economy isn't growing.

On average, the panel believes the unemployment rate will reach 5.9% by the end of 2023 — nearly a 1% increase from the current unemployment rate.

Derek Holt, VP and head of capital markets at Scotiabank, sees a modest half-percentage point increase in unemployment by end of the year, based primarily on, "slightly faster growth in the workforce, including through immigration, than [via actual] sustainable employment gains."

Angelo Melino, professor at the University of Toronto, expects to see unemployment at 6% by year-end due to "a slowdown in economic growth that will reduce the demand for labour."

Lars Osberg, McCulloch Professor of Economics for Dalhousie University, sees a more aggressive increase to 6.5% by year-end citing, "slowing construction and consumer spending"

Canada's interest rate forecast: The housing market impact

The average price of a Canadian home sold in January was $612,204, a year-over-year decline of more than 18% (it was 12% in January), according to the Canadian Real Estate Association (CREA).

When asked what the price action will look like this year, nearly every Finder expert who commented on real estate (with the exception of one), believed Canada's real estate market will remain in a macro downtrend for all of 2023.

Regarding Canada's real estate market, Finder's panel of experts believes:

• • • 88% — Anticipate property prices will only decline further as we move toward the end of 2023
    • 55% — Most believe prices will drop another 10% by the end of 2023, compared to Jan 2023
    • One Finder expert anticipates a drop of 15% in average housing prices by the end of the year

Carl Gomez, chief economist and head of market analytics for CoStar Canada, explains, "With pent-up demand among both buyers and sellers, further adjustments to prices may be required to get the market moving."

Senior Lecturer in Economics at Concordia University, Moshe Lander, explains how the supply side of housing keeps prices rising, despite rapid rate hikes over the last year.

Housing prices should fall much more, but supply remains constrained thanks to overly restrictive zoning laws in many Canadian municipalities. Once people readjust to the higher interest rates, demand will recover and limit the fall in prices.

Insolvencies will rise in 2023 among homeowners

We asked the Finder panel if insolvencies would continue to rise in 2023, and the answer was a unanimous yes, particularly among heavily indebted homeowners.

Nikola Gradojevic, professor of finance at the University of Guelph, stresses the real impact of inflation, specifically in energy and food, putting Canadians in a difficult position.

"Households and businesses have been forced to incur a lot of debt. Maintaining the same living standard with almost no salary increments is difficult amidst rampant inflation. Utility and grocery bills are out of control."

Sherry S Cooper, chief economist for Dominion Lending Centres, expressed concern: "When variable rate mortgages renew, some households will be squeezed enough [to result in] forced selling [of their home]."

Will Dunning, President and CEO of his namesake economic research firm warns, "This is very early days in the impacts of excessive interest rates, and we are not yet seeing the employment impacts that will develop."

Finder's expert panel

Associate professor, University of New Brunswick – Murshed Chowdhury

Director of economics for Canada, Oxford Economics – Tony Stillo

Professor, University of Toronto – Angelo Melino

President, Will Dunning Inc. – Will Dunning

Professor of finance, University of Guelph – Nikola Gradojevic

Vice president and head of capital markets economics, Scotiabank – Derek Holt

Chief economist and head of market analytics, CoStar Canada – Carl Gomez

Senior fellow, Macdonald-Laurier Institute – Philip Cross

Chief economist, Dominion Lending Centres – Sherry Cooper

Senior lecturer in economics, Concordia University – Moshe Lander

Rates strategist, National Bank of Canada – Taylor Schleich

Deputy Chief North America Economis, Capital Economics, Stephen Brown

Chief Econonomist, CIBC, Avery Shenfeld

McCulloch professor of economics, Dalhousie University – Lars Osberg

Survey methodology

The Finder: Bank of Canada Interest Rate Forecast report surveyed 16 Canadian economists and industry experts between February 24 and March 1, 2023. Respondents were asked about the upcoming overnight rate announcement by the Bank of Canada scheduled for March 8, 2023.

The online survey allows panellists to answer or skip questions. As a result, the number of responses received may vary by question.

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