Rate hikes a near certainty amid current market realities – BMO

Canada is "well overdue" for higher rates, BMO says

Higher rates now appear to be all but inevitable considering current market conditions, according to a new analysis by BMO.

The main factor impelling possible rate hikes is sales activity, BMO said. October levels were 32% above the pre-pandemic run rate, and the dollar value of sales was 86% higher than its 2019 average.

The national benchmark price has also surged by 40% since then, BMO said.

“The Canadian housing market is well overdue for higher rates, and momentum is still pointing upward until it gets them,” said Robert Kavcic, senior economist and director of economics at BMO. “Tight conditions remain across most of the country… Smaller markets around the perimeter of the biggest cities continue to lead price growth, but the urban centres are strong as well. Condo prices also continue to gather momentum, up almost 20% annualized over the past three months, and 15% from a year ago.”

Another crucial element in these dynamics is the inflation rate, BMO said. The bank is anticipating headline inflation to hover at an average of 3.3% in 2021 and 2022.

In its most recent rate announcement, the Bank of Canada said that its inflation target of 1-3% would be sustainably achieved by sometime in mid-2022. The central bank also projected interest rates to begin rising in the second half of next year.

Former Bank of Canada Governor Stephen Poloz said that the term “transitory” used by observers to characterize the current inflation spike sets up unrealistic expectations on the Canadian economy’s near-future prospects.

The word ‘transitory’ sounds really short to people,” Poloz said in an interview with BNN Bloomberg. “I think the big things that are affecting the view right now will take probably into next spring, say the next six to 12 months for them to work their way out… So many things tugging in opposite directions. You’d expect that the net effect of all these things will be a question mark for some time.”

MBN

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