Still Room For an INTEREST RATE PAUSE From Bank Of Canada In March? Updated Forecasts & Warning 2023

Still Room For an INTEREST RATE PAUSE From Bank Of Canada In March? Updated Forecasts & Warning 2023


It’s been a little bit over a month and it’s time for another Bank of Canada meeting where they discuss rate hikes this coming Wednesday. We’ve got some more new data since the last rate hike, the Bank of Canada has new warnings, and will be discussing all this in this video coming right up.


Summary From Last BoC Meeting

Let’s do a quick refresher on where we left off with the Bank of Canada. At the last rate hike announcement, the bank of Canada raised rates by 25 basis points, but then also gave strong forward guidance telling us that they plan on pausing rates to monitor the lagging effects of rate hikes on our economy. 

They were pretty hopeful that food prices, oil prices, and even shelter inflation will slow down, but the trickiest part is to control services inflation because a lot of it depends on our tight local labour market.


New Data Since Last Meeting

Since then, we’ve seen more data come out. 

We have housing starts that appears to be slowing down which would be a problem because our population is growing quickly and that could translate to even higher shelter inflation. We did another video on this and a quick summary is that it’s too soon to tell right now. The news was based on just one month of data so far comparing near peak housing starts in December to seasonally low housing starts in January so we’ll have to keep monitoring this before we can give a concrete view on where things are going.

We also saw a labour market that was way stronger than expected. But after we dove into that, it appears that it’s correlated to the immigration growth that we’ve been seeing, and the good news is that wage growth isn’t as worrying for now. 

And then we also saw consumer spending data coming in stronger than expected, which means our economy is a lot more resiilent than we thought and not good news for the BoC. We’ll need to see softer spending in order for inflation to come down. 

Next, we have inflation numbers coming in for the month of January, and this finally offered a glimpse of good news with inflation numbers coming in below expectations, which gives the Bank of Canada more confidence to pause rates.

Both headline and core CPI came in below expectations month over month. When you dig into the basket composition, you can see that food inflation made up of a good chunk of the inflation number for January, which is a big problem. Energy prices also came back up and that was also not expected since we were expecting it to come down more. On the other hand, service is inflation didn’t see as much growth as expected.

Now, because food inflation came out stronger than expected, Tiff Macklem is not impressed and suspects businesses are taking advantage of high inflation to hike prices more than needed to further pad their bottom line because the commodity prices and supply chain improvements should point to price gains slowing down. So, his big warning for businesses is that if they don’t act more ethically, then the BoC may have no choice but to “do more”.

Finally, Canada GDP came out and flatlined in Q4 which was way below market expectations calling for a 1.5% increase and below Bank of Canada’s forecast at 1.3%.  So, there’s ultimately data to support more rate hikes and data to support a pause.

Will The Bank Of Canada Raise Interest Rates In March 2023?

At this current moment, the strong forward guidance from January still remains intact, and if The BoC wants to remain credible with the rest of us, we don’t anticipate that they will be raising rates this next round. 

At the current moment, all of the big Canadian banks are still predicting that The BoC will maintain target rates at 4.5% for most of this year, with the exception of Scotia adjusting upwards their forecast by 25 basis points, because they thought rates would peak at 4.25%.

The bond market is reacting a bit differently with bond yields creeping up again. In other words, the market is pointing to a higher chance of more rate hikes from The BoC. So as we’re seeing a bit more divergence , it’s hard to tell what might happen but the BoC will probably be monitoring these things closely to make future decisions:

  1. Food inflation is coming in stronger than expected and it could possibly be caused by businesses taking advantage of the situation. So, BoC should be looking at both headline inflation, which includes food and energy, plus core inflation which excludes food and energy, instead of primarily core inflation like they mentioned before. 
  2. The BoC should also be continuing to monitor services inflation because that’s the trickiest to predict.
  3. And finally, the rate of increase would also be important because BoC doesn’t want to see inflation goes over 3% annually, which means around 0.25% month over mont increases on average. We just saw a 0.5% month over month increase and  so future steps need to be smaller if we want to see target rates remain at current levels for the rest of this year.

How We Can Help

We’re a real estate sales brokerage, and the reason why we’re monitoring economic data very closely is because the housing market is highly dependent on interest rates. 

When interest rates rise, we tend to see home prices drop and rents go up, and most of the effects have already been priced into the Toronto real estate freehold market and that’s why we are now seeing more demand because the price is now right as long as rate expectations don’t change much beyond this point. 

However, any further rate increases not yet priced in can translate to more price drops and rent increases, and this case is definitively still possible and so we will try to continue to update you on any news on this front. 

And if you want to invest in Toronto real estate, and want to discuss a more personalized real estate investing strategy with us, we would be happy to chat.


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