CIBC expects new 0.5 percent interest rate hike amid signs of Canadian housing market “starting to slow”

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      The Bank of Canada is set to make an announcement about its interest-setting rate on June 1.

      Unless current assumptions about the economy turn out to be grossly inaccurate, the central bank is widely anticipated to hike its key rate by another 0.5 percent in a bid to tame inflation.

      This follows the 0.25 percent and 0.5 percent increases it announced in March and April this year, which brought the policy rate to one percent.

      Based on resale numbers in April 2022, the Canadian housing market has shown signs of slowing down in the face of rising interest rates.

      A new increase could lead to a further deceleration in sales.

      As CIBC Capital Markets notes, the housing market is one area of the economy that is “most sensitive to interest rate increases”.

      In a report Friday (May 27), bank economist Andrew Grantham wrote that there should be confirmation next week that the Canadian economy “grew at a brisk rate” in the first quarter of 2022.

      “A day later,” Grantham wrote, “the Bank of Canada will, correctly, respond by raising interest rates by a further 50bp, and in doing so continue to describe an economy that is in an ‘excess demand’ phase”.

      “That’s all pretty clear cut,” the CIBC economist asserted.

      Grantham’s piece went on to analyze what “excess demand” means.

      To illustrate, the economist noted that Canadian households are “continuing to spend more on goods per capita than before Covid struck”.

      “But by and large excess demand in Canada is much more concentrated in one area — housing,” Grantham noted.

      “That also just happens to be the area of the economy that is the most sensitive to interest rate increases, and an area that recent home resale data suggests is already starting to slow from the ‘exceptionally high’ levels that the Bank of Canada described in its last policy statement,” he continued.

      To recall, sales in the Greater Vancouver real estate market marked a 34.1 percent annual decline in April 2022 compared to the same month last year.

      Last month’s sales also represented a 25.6 percent decline from March 2022.

      However, prices stayed up.

      The real-estate board had reported that the benchmark price of all types of Greater Vancouver housing properties rose in April 2022 to $1,374,500.

      This means an 18.9 percent increase over April 2021, and a one percent increase from March 2022.

      On a national level, Canadian Real Estate Association (CREA) had reported that home sales declined on a month-over-month basis in April 2022.

      Canadian housing sales dropped by 12.6 percent in April compared to March 2022.

      CREA reported that the slowdown in sales “placed monthly activity at the lowest level since the summer of 2020”.

      The home price index dipped 0.6 percent month-over-month in April, but was still up 23.8 percent year-over-year.

      CREA stated that the drop was the “first month-over-month decline since April 2020”.

      In its last policy announcement of a 0.5 percent rate increase on April 13, the Bank of Canada noted that the Canadian housing market activity, “which has been exceptionally high, is expected to moderate”.

      Meanwhile, CIBC’s Grantham wrote in his May 27 CIBC report that a “moderation in house prices will also have a direct impact” on inflation.

      The central bank had noted that inflation in Canada is at 5.7 percent, which is way above its target of two percent.

      As Grantham noted, “inflation has continued to surprise to the upside”.

      “However, any admission that the housing market is already responding to higher interest rates should also be seen as an admission that excess demand is about to become less excessive,” the CIBC economist stated.

      In a point that should somehow calm home buyers worried about getting sidelined by high interest rates, Grantham continued, “That is one of the key reasons why we think that, after another 50bp hike in July, the pace of hikes will slow down, and the Bank won’t need to take rates any higher than the 2.5% mid-point of its neutral band to achieve 2% inflation sometime in 2023.” 

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