Market Too Enthusiastic About Rate Cuts: Tal
The Bank of Canada is not likely to start cutting interest rates as early as the market expects, says CIBC World Markets’ deputy chief economist.
Benjamin Tal told the Globe and Mail that the market is “a bit too enthusiastic” about the timing of the first cut.
“They are talking about the first quarter or early in the second quarter, maybe April,” Tal told the Globe. “I think that’s way too early. Both the Bank of Canada and the [U.S. Federal Reserve] will have to make sure that inflation is absolutely dead before they cut interest rates. The Bank of Canada would prefer to overshoot relative to undershoot because when you overshoot, you can always compensate by cutting interest rates. When you undershoot, you have to deal with inflation and inflation is very difficult to deal with.”
BofC Govenor Tiff Macklem has said he wants inflation to return to the central bank’s 2% target before interest rate cuts begin. He has sent mixed signals on the timing of rate cuts. But some Canadian lenders have already started offering mortgages at rates below the BofC’s 5% overnight rate in anticipation of reductions.
Canada’s inflation rate rose to 3.4% in December after holding steady at 3.1% in November. Tal predicted that the BofC will start cutting interest rates in the second half of 2024 reduce them by a total of 150 basis points over the course of the year. The Fed, he added, will introduce cuts after Canada in the second half, implementing a 1% reduction by year-end 2024.
Tal anticipates that the BoC’s overnight rate will fall to about 2.75% by 2025.
In Canada, unlike in the U.S. and other countries, mortgage interest payments are increasing inflation, he noted.
“So, the Bank of Canada is raising interest rates to fight inflation,” Tal told the Globe. “Higher interest rates are adding to inflation by increasing mortgage interest payments.”
To get a better read on services inflation, he does not include mortgage interest payments when calculating shelter costs.
“If you remove mortgage interest payments, inflation is already at target,” he told the Globe.
Tal does not expect housing prices to increase sharply when interest rates start to fall. He called the current price correction due to high rates “very healthy.”
High interest rates have caused most of their damage in the condo sector, which is slowing down due to a surplus of supply as investors, who constitute 50% to 60% of the market, sell their units.
“If you look at construction, it’s still there because it started two years ago, so the supply is there but demand is not there,” Tal told the Globe.
(Pictured: Bank of Canada Governor Tiff Macklem)
- ◦Sale/Acquisition
- ◦Development
- ◦Financing
- ◦Economy
- ◦Policy/Gov't