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Interest Rate Prediction

Interest Rate Prediction Hero


The Bank of Canada is watching a number of economic indicators to ensure current interest rate levels are sufficient to bring inflation back into the target range. The current reading on a number of key indicators shows that it is uncertain if inflation is falling fast enough or further interest rate hikes are required.

Magic 8-ball, will interest rates start going down by the end of 2023?

Reply hazy, try again.

Why is it so hard to predict what will happen to interest rates this year?

After the steepest series of interest rate hikes in Canadian history between March 1, 2022, and January 24, 2023, the Bank of Canada has been on hold with any further changes to the policy rate.

This subsequent period of wait-and-see is to allow the interest rate hikes to do their job. It also allows the Bank of Canada to watch economic indicators to ensure inflation is on target to fall below 2%. If the current 4.5% policy rate does not slow the economy down enough, and there are concerns inflation may stay too high for too long, even more extraordinary efforts to cool the economy back to the target growth range will be required.

While many believe interest rates will start declining again by the end of 2023 or early 2024, and there are signs that the current interest rate is fulfilling its intended purpose, there are some indications that there could be additional rate hikes as soon as this summer if areas of the economy remain stubbornly elevated.

So, what are the indicators that The Bank of Canada and economists everywhere are watching to predict if the economy is on target or overheating again?

Interest Rate Prediction CPI

Inflation is the rate of change in a group of pre-defined goods and services purchased by households over a 12-month period, which in Canada is based on the Consumer Price Index (CPI). After decreasing steadily from a peak of 8.1% in June 2022 according to Statistics Canada, down to 4.3% in March 2023, April 2023 saw an increase to 4.4%. While only a small increase, the Bank of Canada will be watching closely for any longer trends of increases, as the target is between 2% and 3% growth. Current Impact: Inflation remaining above target suggest a need for raising rates further.

Interest Rate Prediction Unemployment Rate

Unemployment starts to go up, Job Vacancies decrease, and wages stabilize in a cooling economy. Canadian unemployment at 5.0% (April 2023, Statistics Canada) remains quite low, just above the all-time low of 4.9%. The job vacancy rate (the number of job vacancies as a percentage of total combined occupied and vacant jobs) has started to move down again as of March 2023 to 4.5% according to Statistics Canada, after rising to 4.9% in January 2023 and peaking at 5.7% between March and May 2022. Meanwhile, average wages continued to rise well into the interest rate hike program, peaking in January 2023. While February saw a 0.4% decrease, average wages grew by 0.7% in March 2023. There will need to be several months of little-to-no increase for there to be a clear indication of slowdown in this portion of the economy. Current Impact: Low unemployment, elevated job vacancy rate, and continued wage growth suggest a need for raising rates further.

Gross Domestic Product (GDP) measures the dollar value of goods and services produced within the country. In a cooling economy we would expect to see lower growth, or even negative growth as prices start to decrease. A recession is two or more consecutive quarters of negative GDP growth (a technical recession is exactly two quarters of negative GDP growth). February 2023’s Canadian GDP growth was 0.1% over January 2023 according to Statistics Canada, definitely slowing, but still positive. We have only seen one month of negative GDP growth since The Bank of Canada started hiking interest rates (December 2022) and have yet to see a full quarter of negative GDP growth – annual growth as of February 2023 was 2.5%. Some of the areas that have contributed to stubbornly buoyant GDP have been strong energy prices and continued retail sales growth. Current Impact: positive GDP growth suggests a need for raising rates further.

Interest Rate Prediction Bond Yield

The Government of Canada Bond Yield tends to trend up when the market expects banks to raise interest rates and trend down when the market believes banks are considering lowering rates. Because it is almost guaranteed that The Government of Canada will pay out their bonds, the yield difference between the bonds traded on the open market and mortgage rates is used to benchmark other interest rates in Canada – the more valuable/in-demand a bond is, the weaker the economy is perceived to be. As of May 29, 2023, the yield for the Canada 5-Year Bond had been trending upwards, indicating that there is market sentiment of an impending rate increase. Current Impact: upward trending yield suggests a need for raising rates further.

Interest Rate Prediction Home Prices

The Canadian housing market was one of the leading indicators of massive inflation as the composite benchmark price increased 61% between December 2019 and March 2022 according to the Canadian Real Estate Association (CREA). Following this enormous run-up, the composite benchmark price decreased 18% from March 2022 to January 2023, but has increased in the following three months by 5%. This return to price increases shows that there is still some liquidity in the housing market, even with elevated interest rates, and could indicate a need for further interest rate hikes to slow the economy down to the achieve the target level. Current Impact: upward trending housing prices suggests a need for raising rates further.

As much as we like to think Canada is a separate economy from the U.S., the two are inexorably linked. If the U.S. Federal Reserve raises rates substantially higher than ours, Canada will likely have to raise in the long run, unless there is clear proof that our economy is behaving differently than our neighbour’s to the south. A weaker Canadian dollar might cause the Bank of Canada to continue raising rates. Current Impact: declining value of the Canadian dollar to the US dollar suggests a need for raising rates further.
While these are the prime indicators that the Bank of Canada and economists are watching to regulate inflation, there are additional ones considered. If inflation stubbornly remains above the 2% target in the next few months, it is possible we could see further interest rate hikes. If current interest rates are sufficient to guide the economy back down to the 2% target inflation rate over the coming months, cuts to interest rates could come by the end of 2023 or beginning of 2024. However, even if inflation returns to normal, rate cuts are not necessarily guaranteed right away.

The Bank of Canada likely needs to see a few more months of data around key economic indicators to determine if the current prime interest rate is enough to complete the task it was put in place to do.

Pour plus d’informations, veuillez contacter:

Susan Thompson

Associate Director, Research

Vancouver - Rogers Tower

Susan is a long-standing analyst and commentator on the commercial real estate market.  Her continuing work with local, national, and international media as a commentator for the commercial real estate sector has given her recognition within the industry as one of the preeminent sources of information and knowledge for leasing and transaction analysis and market trends.

Susan was previously with Avison Young working as their Research and Insight Manager over the course of nine years  (a boomerang employee: with them for four years, away for five years, then back for five years). She was responsible for dozens of reports on the Calgary commercial real estate market, covering office, retail and industrial leasing as well as business condominium properties and commercial property sales. More recently she focused on data-driven storytelling through reports, media work, and client engagement utilizing techology and analytics to help make better-informed decisions. 

In between periods with Avison Young, she spent over five years with Calgary Economic Development; first as their Business Development Manager specializing in Real Estate, helping companies bringing their business to Calgary navigate the local commercial real estate market, then as their overall Research Manager providing economic analysis and commentary on the Calgary market.

In prior years, after starting her career in assessment, Susan spent over seven years with RealNet Canada, the leading provider of third-party commercial real estate sales information. Working her way up from Research Analyst to Manager for the Calgary office, Susan analyzed thousands of commercial real estate transactions and is extremely knowledgeable about the commercial real estate market in Calgary. 

Susan has a Bachelor of Commerce degree, with a major in Management Science from the University of Alberta. Well recognized in the industry, Susan’s name is often seen in the media as she provides commentary and insight on current commercial real estate topics. Susan's breadth of knowledge across the commercial real estate market and in data analytics is an asset across the industry.

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