Is Bank of Canada Pivoting From Rate Increases?

As the CRE community in the US holds its breath awaiting another rate hike expected from the Fed, glimmer of hope emerged from an unexpected place: the Bank of Canada.

There was nothing hopeful about what Canada’s central bank actually did on Wednesday: it enacted its seventh consecutive rate hike, a 50 bps increase, bringing the bank’s target rate to 4.25%. It was what the bank’s governors said immediately after the rate hike that has US investors crossing their fingers.

At a press conference after delivering a speech in Montreal, Bank of Canada Deputy Governor Sharon Kozicki signaled that a pivot is approaching.

“We’ve gone from a world where we were trying to decide how much each policy increase needed to be, to a world where we’re now asking the question of if we need to be increasing the policy rate,” Kozicki said, according to a report in the Toronto Star.

Kozicki said future decisions on rates will depend on a range of data, including consumer demand, business activity and inflation. The newspaper characterized her comments as a “significant shift in tone.”

However, Kozicki also indicated that the bank doesn’t expect the inflationary fever to break quickly in Canada, reflecting the central bank’s concern—shared by their counterparts at the Fed—that inflation could become “entrenched,” meaning that consumers start to expect and accept higher prices.

“We’re in a world where we still have high inflation. We still have high short-term expectations of inflation, we still have evidence of excess demand,” Kozicki said, according to the Star’s report.

In what sounded like an echo of candid comments made by US Treasury Secretary Janet Yellen earlier this year, Kozicki conceded that the barrage of rate hikes in Canada this year were needed in part because of the central bank’s failure to forecast an out-of-control inflationary spiral.

Kozicki said most of the forecast errors were due to a failure to anticipate global factors weighing on the Canadian economy.

Although rates are nearing a 15-year high in Canada, Kozicki warned that it will take time for the impact of rates to flow through the economy and start pulling inflation—measuring 6.9% in October in Canada—in the direction of the bank’s 2% target, which is the same target set by the Fed in the US.

While Canada’s housing market has stalled, Bank of Canada reported that it is still seeing “overheated demand” in the hotel and restaurant sectors—and in food prices, which continue to rise despite a drop in the prices of underlying commodities.

Regarding the impact of rate increases on households in Canada, Kozicki suggested there was no way to shield them from actions that are designed to pull inflation down across all sectors.

“We only have that one instrument, we can’t target different segments of society,” she said, according to the Star’s report.