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Tag: BOC

  • Canada housing market upturn could delay shift to BoC rate cuts

    Canada housing market upturn could delay shift to BoC rate cuts

    TORONTO, May 14 (Reuters) – Signs of recovery in Canada’s housing market after a year-long slump, just as higher borrowing costs are expected to slow much of the rest of the economy, could raise inflation and delay a shift by the central bank to interest rate cuts, analysts said.

    The housing market’s upturn comes after the Bank of Canada paused its interest rate hiking campaign last month, leaving the benchmark rate at a 15-year high of 4.50% since January.

    In addition, analysts say higher borrowing costs have so far caused less financial stress for homebuyers than they had expected, so the market has not had to accommodate a flood of supply from forced sellers.

    The BoC is counting on slower economic growth to return inflation to its 2% target. A rebound in the housing market could boost activity and contribute directly to price pressures.

    “The Bank of Canada at the end of the day is probably not going to be too thrilled if the housing market really starts to ramp up,” said Robert Kavcic, a senior economist at BMO Capital Markets. “From a shelter cost perspective, you are going to start to see more upward push on inflation in the second half of this year.”

    The cost of shelter has the highest weighting in Canada’s consumer price index, accounting for 30%. And, home prices tend to be highly visible, so an increase could have a pronounced impact on inflation expectations, analysts say.

    The average price for a home in the Greater Toronto Area, Canada’s most populous metropolitan region, rose in April on a month-over-month basis for a third straight month, while sales also moved higher. Other major markets have also showed gains.

    Despite higher borrowing costs, mortgage delinquency rates have remained low for now in Canada after mortgage borrowers were put through a stress test showing they could manage if interest rates were 2 percentage points higher than the rate on their loan.

    In addition, variable-rate borrowers have been sheltered from higher interest rates after lenders temporarily extended the period over which their debt is amortized, keeping their payments the same.

    “One of the reasons the market has been able to stabilize so quickly is because there’s just no forced selling,” Kavcic said.

    Things could change – Royal Bank of Canada recently warned of the risk that mortgage delinquencies rise by more than a third over the coming year.

    The other worry is that stress in the U.S. regional banking sector could spill over to Canada. Clues on that front could come from the BoC’s Financial System Review – an annual checkup of financial system tensions – which is due for release on Thursday.

    But there are also tailwinds to support a recovery, including supply shortfalls, record immigration and labor market strength, analysts said.

    Wage growth could cool over the coming months, helping to lower inflation, but the Bank of Canada “is unlikely to be in a rush to cut interest rates if house prices are roaring higher again,” Stephen Brown, senior Canada economist at Capital Economics, said in a note.

    Reporting by Fergal Smith; Editing by Steve Scherer and Jonathan Oatis

    Our Standards: The Thomson Reuters Trust Principles.

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  • Canada’s deep yield curve inversion adds to BoC rate hike dilemma

    Canada’s deep yield curve inversion adds to BoC rate hike dilemma

    TORONTO, Dec 4 (Reuters) – As the Bank of Canada considers ditching oversized interest rate hikes, it is dealing with an economy likely more overheated than previously thought but also the bond market’s clearest signal yet that recession and lower inflation lie ahead.

    Canada’s central bank says that the economy needs to slow from overheated levels in order to ease inflation. If its tightening campaign overshoots to achieve that objective it could trigger a deeper downturn than expected.

    The bond market could be flagging that risk. The yield on the Canadian 10-year government bond has fallen nearly 100 basis points below the 2-year yield, marking the biggest inversion of Canada’s yield curve in Refinitiv data going back to 1994 and deeper than the U.S. Treasury yield curve inversion.

    Some analysts see curve inversions as predictors of recessions. Canada’s economy is likely to be particularly sensitive to higher rates after Canadians borrowed heavily during the COVID-19 pandemic to participate in a red-hot housing market.

    “Markets think the Canadian economy is about to suffer a triple blow as domestic consumption collapses, U.S. demand weakens and global commodity prices drop,” said Karl Schamotta, chief market strategist at Corpay.

    The BoC has opened the door to slowing the pace of rate increases to a quarter of a percentage point following multiple oversized hikes in recent months that lifted the benchmark rate to 3.75%, its highest since 2008.

    Money markets are betting on a 25-basis-point increase when the bank meets to set policy on Wednesday, but a slim majority of economists in a Reuters poll expect a larger move.

    RESILIENT ECONOMY

    Canada’s employment report for November showed that the labour market remains tight, while gross domestic product grew at an annualized rate of 2.9% in the third quarter.

    That’s much stronger than the 1.5% pace forecast by the BoC and together with upward revisions to historical growth could indicate that demand has moved further ahead of supply, economists say.

    But they also say that the details of the third-quarter GDP data, including a contraction in domestic demand, and a preliminary report showing no growth in October are signs that higher borrowing costs have begun to impact activity.

    The BoC has forecast that growth would stall from the fourth quarter of this year through the middle of 2023.

    The depth of Canada’s curve inversion is signaling a “bad recession” not a mild one, said David Rosenberg, chief economist & strategist at Rosenberg Research.

    It reflects greater risk to the outlook in Canada than the United States due to “a more inflated residential real estate market and consumer debt bubble,” Rosenberg said.

    Inflation is likely to be more persistent after it spread from goods prices to services and wages, where higher costs can become more entrenched. Still, 3-month measures of underlying inflation that are closely watched by the BoC – CPI-median and CPI-trim – show price pressures easing.

    They fell to an average of 2.75% in October, according to estimates by Stephen Brown, senior Canada economist at Capital Economics. That’s well below more commonly used 12-month rates.

    “The yield curve would not invert to this extent unless investors also believed that inflation will drop back down toward the Bank’s target,” said Brown.

    Like the Federal Reserve, the BoC has a 2% target for inflation.

    “The curve is telling us the Bank of Canada will be forced into a reversal by late 2023, with rates remaining depressed for years to come,” Corpay’s Schamotta said.

    Reporting by Fergal Smith; Editing by Andrea Ricci

    Our Standards: The Thomson Reuters Trust Principles.

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