MNI INTERVIEW: BOC Likely To Hold In July, Save Firepower, Economist Says

MNI (OTTAWA) - Canada's central bank will hold interest rates at its next meeting after an uptick in the last inflation report, and to leave room for action as mortgage holders face punishing refinancing rates over the next few years, an economist whose research has been backed by the BOC told MNI.

“I think they would hold off on cutting rates the next time” University of Toronto professor Murat Celik said. “I know that they are aware of the same problem, that in two years, that will be the real test. They might want to hold up on cutting rates a little bit more.” (See MNI INTERVIEW: BOC To Skip Cuts At 2 Of 4 Meets This Year- ATB's Parsons)

A majority of investors see another reduction in rates at the BOC’s next decision July 24, after Governor Tiff Macklem led G7 central banks with a quarter point cut to 4.75% last month. Officials have said more cuts will be justified if inflation shows more progress back to target but the last report showed CPI ticking back up to 2.9% from 2.7%.

Celik, winner of a two-year Governor's Award, told MNI last year he expected sticky prices and this still remains his view, even as the Bank says inflation will slow to 2% sometime next year. There is one more inflation release on Tuesday and other recent indicators have shown mixed results. (See: MNI INTERVIEW:BOC Faces Sticky Inflation Fight-Research Winner)

KEEP EMERGENCY TOOLS

“What I think would be more optimal is to hold off cutting rates until when you need them,” Celik said. “If they cut earlier, my hunch is that the Bank of Canada will need to cut rates even further in two years, and then you might have the Canadian dollar depreciating, that’s my real concern.”

One of Canada's most popular mortgages is a fixed-rate loan that resets every five years, meaning the drag of 10 rate hikes that started early in 2022 is just starting to weigh on many borrowers.

Canadians have less scope to walk away from a home than in the U.S., so there’s a greater risk consumer spending will suffer, Celik said. “They are going to spend all of their money on keeping their mortgage afloat, but then they are going to cut spending elsewhere and that might hurt the real economy,” he said. While many industry experts say Canada's low default rate is proof of the housing market's resilience, Celik said  “the default rate doesn’t paint the full picture in Canada.”

Condo markets are vulnerable to a correction and there remains the risk of a major housing slump, Celik said. Asked about the Bank's current review of its first-ever use of full-scale QE during the pandemic Celik said those tools should remain available especially if there is a downturn linked to consumer finances. “I don’t think there’s any way out, the question is how much are they going to use the tools,” he said. “Some people will definitely be in trouble.”

Canada’s governing Liberals have moved to slow record immigration blamed for driving up rental costs, but Celik said the data has yet to show any moderation in population that would ease those pressures. What could lead to a sudden change that would curb the housing market is if Conservatives leading in polls today win an election due by late next year, he said.