Varun Kohli September 10, 2022 No Comments

The narrative that the spate of big rate hikes we’ve seen will force central banks to back off on further increases continues to build. An internal CIBC note the Financial Post reported on suggests that we will see a 75 basis point rate increase on September 7th. This would take rates up to 3.25%,  levels not seen since the late 2000s. CIBC sees rates at this level preceding a “narrative shift”. The Bank of Canada has previously said that policy rates over 3% would be neutral to the broader economy (neither helping nor reducing growth). A further hike of 50 basis points in October is expected, and this would start to grind down economic output and potential. At that point, CIBC is suggesting the Bank of Canada would be in a difficult position, and would enter a “period of inertia” – according to CIBC.

If unemployment goes up and inflation starts to decline in the next few months, we could begin to see Central Banks shift their language. A return to “accommodative policy” would likely follow. Q4 2022 will be critical to how the Bank of Canada behaves and how 2023 shaped up from an economic and housing perspective. At the same time that rates are increasing and more Canadians are turning to debt to pay their bills, Canada’s big banks are reporting solid profits. Q3 financial outcomes were strong for all of Canada’s major financial institutions. While a 75 basis point increase on Sept. 7th is likely, some analysts and bond traders are expecting another 100 basis point increase, as was the case in July. As the U.S. is already technically in a recession, all eyes will be on Canada’s employment, investment, and growth figures. Canada lost almost 75,000 jobs from May to July.

Recent hawkish comments by Fed Chair Jay Powell on the possibility of pain from higher rates prompted a drop in the stock market and in crypto prices. It also saw some financial commentators and headlines discuss the vulnerability of the U.S. economy and equity markets in a geopolitically risky environment with rates that keep going up. At some point, the economic pain of higher rates will begin to bite – and that could force a narrative change. If rates begin to fall later this year and in early 2023, we would see the housing market shift back to dynamism and a big positive shift in psychology.

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