Photo: James Bombales
The Bank of Canada hiked its overnight rate twice this year, but, according to one economist, it may need to reverse course in 2018.
Capital Economics Senior Economist David Madani says interest rates will remain unchanged at one per cent for the near term because of the bank’s uncertainty about the sensitivity of Canada’s housing market.
"The bank is unsure about exactly how sensitive they are, so that's why they're taking things very cautiously. Basically they want to see how households respond to their rate increases this year and they won't really have a good or strong sense of that probably for another three to six months,” Madani tells BuzzBuzzNews.
Madani’s forecast stems from a speech that Bank of Canada Deputy Governor Carolyn Wilkins presented on Wednesday at the Money Marketeers of New York University forum.
According to Madani, the central bank is “petrified about making a policy mistake” and won’t risk raising interest rates again this year.
However, he predicts the bank will reverse course and cut interest rates next year because of the housing market’s flagging activity weighing on the economy.
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A report published today by Capital Economics highlights key topics from Wilkins’ speech that underline the bank’s “wait-and-see” approach to raising rates.
One of the points covered by Wilkins was the uncertainty surrounding how Canadian households will react to the two 2017 interest rate hikes.
Following seven years of no rate increases, the bank hiked the overnight rate, which influences mortgages, in July and September by 25 basis points each time.
Capital Economics’ report states that heavily indebted households will likely struggle to cope with higher interest rates.
The housing market is likely to face additional strain next year, as the Office of the Superintendent for Financial Institutions (OSFI) announced a stress test for uninsured mortgages that will come into effect on January 1st.
"Obviously higher interest rates and tougher mortgage rules should evidently have an effect on the housing market. So, I'm not really expecting to see a meaningful rebound in the housing market,” says Madani.
With tougher bank lending rules, Madani predicts the purchasing power of prospective home buyers will drop roughly 20 per cent next year, resulting in further downward pressure on prices.
Madani, a notorious housing bear, adds that imbalances have been building up in the housing market over several years, signalling a looming correction.