Bank of Canada: It's either permanent inflation or the worst recession in history.

Last Wednesday, the Bank of Canada raised its overnight lending rate to 3.75%, up half a percentage point. Which means, Prime Rate is now 5.95%. 

Think about how to manage your unsecured debts and mortgage debts if you need to pause and take a look at your finances. A specialist may be able to help you either consolidate existing debt or even consider selling your property if things become unmanageable if finances are tight.

Again, a large percentage of Canadian homeowners are mortgage free, and according to big bank data, many had loans that were around 50% loan to value during the pandemic, which means those borrowers should still have a wealth of equity in their properties. 

Those who purchased during the last three years with minimal downpayments like 20% or who took out high-risk loans requiring high-ratio mortgage insurance may be in the worst position.These people may be in a negative-equity situation that makes it almost impossible to sell since they owe more on mortgage debt than the property is worth.

The recent rate hikes will likely increase homeowners' monthly payments by 18 percent, according to Ratesdotca.

If your mortgage is up for renewal, you may want to shop it around. There are still some lenders offering mortgages in the high 4’s although that’s unlikely to last much longer.

Are we likely to see a 3 stage pivot by the Central Bank in Canada? Well, according to experts that seems to be very likely.

It is predicted with only a 50 basis point hike on Wednesday by the Bank of Canada, which was 25 points less than what the market expected, the Bank of Canada may be winding down its front-loading of rate hikes. According to experts like Deputy Chief Economist of CIBC, Benjamin Tal and even prominent traders like Greg Mannarino of traderschoice.net, the fed wil be easing rate hikes in the coming months, only to leave them alone for the next year, which will, of course, allow markets to shoot back up.

According to Rob McLister, of MortgageLogicNews, the Bank of Canada may or may not have made a mistake easing their rate hikes to only 50 basis points when market was expecting 75 points. Most people don’t believe inflation is coming down, although the Bank is telling us it is coming down, except core inflation, which is still rising despite unprecedented rate hikes. 

According to a recent survey, 53% of Canadians don't even know the Bank of Canada has an inflation target, much less a 2% target. Quantitative Tightening is also not well accepted by everyone, and when you factor in the tight labour market, this could create a nightmare for central banks. Due to the fact that people will ask for wage increases to keep up with inflation, inflation will not be lowered.

Market expectations have historically been higher than what the Bank has increased rates.  Based on forward pricing in the bond market, overnight rates are only going to 4.25%, and core inflation is 5.3%, which may be enough for the central banks to stop raising rates for now. Nevertheless, anything can happen, as McLister pointed out. More wars, Chinese trade disputes, oil, the loonie, etc. and it may be too early for the Bank of Canada to get softer on inflation. 

Even though we are headed towards a recession, inflation can still become entrenched. 

There is a possibility that inflation has not peaked. Inflation may have peaked in June, but core inflation is more important. For mortgage interest rates to decrease, we need core inflation back to 3%. Prime could surge like it did in 1981 and if that happened again prime could go to 6.75%.  We should all prepare for the worst on rates. 


I agree with Rob that if rates do not increase further in 2023, consumer psychology will change and prices may bounce in the spring. If sales surge, then we are near a short-term bottom. It's anyone's guess what will happen with unemployment expected to spike, however, the housing fundamentals are still there. Lots of immigration, mortgage stress-test which is now making borrowers qualify at 7.25% for a variabel rate mortgage and so on. 


Economic and financial well-being is the objective of Canada's monetary policy.  Canadians are best protected by a low and stable environment.  A five-year extension of the flexible inflation targeting strategy was announced by the Canadian Government and the Bank of Canada on December 31, 2021. The current inflation target is 2%, being the midpoint between 1 and 3 percent. 

It is within the control range of 1-3 percent that the central bank can actively seek to maintain maximum sustainable employment levels. Inflation expectations will be anchored at 2% using this flexibility.   

Monetary policy changes take time to materialize and work their way through the economy, which is why monetary policy is considered “forward-looking.” 


Throughout the world, inflation has continued to rise this year, reaching highs not seen for decades. In response, many central banks have raised their policy rates. In many countries, underlying inflation has yet to ease despite a decline in commodity prices and easing inflationary pressures due to supply challenges. Businesses and consumers worldwide are feeling the effects of tightening monetary and financial conditions and Russia's invasion of Ukraine. Global economic growth is expected to slow sharply. There has been a significant decline in household spending and investment in the United States. Canadian exports are driven by these factors. Energy shortages and elevated uncertainty are expected to cause economic contraction in the euro area during the second half of 2022. 


As China's economy recovers from the most recent round of lockdowns due to the COVID-19 pandemic, the property market correction continues to stifle growth. Global financial conditions have been affected by the rapid rise in US policy interest rates and the surge in the US dollar. There are rising debt servicing costs for many emerging-market economies (EMEs), with some developing economies having difficulty servicing their debt. Many countries experience inflationary pressures due to the appreciation of the US dollar. In 2023, the Bank of Canada projects global growth to decline from roughly 314% in 2022 to 112%. If the COVID-19 pandemic and the 2008–09 global financial crisis are excluded, this would be the slowest rate of global growth since 1982. Despite tighter monetary policy and tighter financial conditions, growth is expected to pick up to around 212% in 2024. At the global level, inflation is expected to decline to levels that are close to the targets set by central banks in 2024. As monetary policy tightens, commodity prices will fall, supply challenges will ease, and demand will slow, which will lead to lower inflation.


Here are the Bank of Canada’s changes to the projections that made in July:

There are potential output growth changes. The negative effects of supply chain disruptions on productivity and of labour market mismatch that previously assumed to be temporary are now assumed to be permanent. 

Financial conditions are tighter, and wealth is lower than expected. Household spending has consequently been revised down. 

As a result of lower commodity prices and weaker foreign demand projections, exports have been revised downward. These effects are partially offset by the depreciation of the Canadian dollar.

It is expected that business investment will decline this year due to tighter-than-expected financial conditions, weaker foreign demand, and the recent depreciation of the Canadian dollar, which has raised the price of imported machinery and equipment in Canadian dollars.

Inflation in the consumer price index (CPI) is expected to be lower than previously predicted in 2022 and 2023. According to revised forecasts, CPI inflation will be just under 7% in 2022 and about 4% in 2023. Inflation is expected to remain relatively unchanged in 2024. Several factors contributed to the downward revisions, including lower gasoline prices and weaker demand. Inflation in 2023 is also expected to be reduced by lower-than-expected shipping costs and easing global cost pressures. These cost pressures are partially offset by the weaker Canadian dollar.





Global economic challenges and risks are becoming more complex. There is still widespread and high inflation in most countries. Some central banks have begun shrinking their balance sheets as well as raising interest rates rapidly. A tightening in financial conditions has increased financial stress in 2022. 

Rising geopolitical tensions and Russia's invasion of Ukraine remain major uncertainties. The projection incorporates some of the risks identified in previous issues of the Report. Base-case scenarios include weaker global growth, lower commodity prices, tighter global financial conditions, and sharper declines in Canadian housing activity in the near term. 

There are two main risks to the inflation outlook, according to the Bank. It is possible that inflation could stay higher for a longer period of time than predicted in the base case. Inflation expectations failing to adjust downward as expected is one way this could occur. This would result in a wage-price spiral according to the July Report. Stickier inflation can also be caused by other factors. A global economic slowdown could be even more severe and inflation could fall further than expected. Since inflation is persistently high, the Bank is more concerned about the upside risk than the downside risk.

Upside risk: High inflation that persists Inflation could persist at a higher rate than expected. Global or domestic channels could pose this risk. There are some global factors responsible for recent high inflation that could last longer or have a greater impact on consumer prices than expected. Price spikes in oil, natural gas and agricultural products could result from an intensification of supply disruptions caused by Russia's invasion of Ukraine. Increased geopolitical tensions may prolong supply chain disruptions, creating higher prices for internationally traded goods. It is also possible that domestic factors will keep inflation high. The pandemic has increased short-term inflation expectations. The inflation rate will remain higher for longer if these expectations persist longer than expected. Additionally, households may tap into their higher levels of savings more than anticipated. Inflation would be pushed higher by increased household spending.

Global financial vulnerabilities could amplify the impact of tighter monetary policy in many countries, leading to a severe global slowdown. There is a high level of debt in many countries, including sovereign debt, nonfinancial corporate debt, and household debt. There is also a vulnerability associated with significant external borrowing in US dollars for several EMEs. Lower levels of liquidity have made some funding markets more fragile. It is possible for higher-risk borrowers to face funding strains and a prolonged period of deleveraging as a result of an abrupt repricing of risk. Consequently, commodity prices are likely to fall and a global slowdown will be more severe. Foreign demand could be weaker, terms of trade could fall, and spillovers could affect the Canadian economy. The resulting tighter financial conditions and higher unemployment could undermine homebuyer sentiment and lead to a larger-than-expected drop in house prices. This in turn could reduce household wealth, access to credit and consumer confidence. The base case assumes that the spike in goods prices since the beginning of the pandemic will persist. In the event of a slowdown, however, these prices could decline in global growth proves to be more severe than anticipated. 

A sharper slowdown, especially in the US,  may result in retailers offering deep discounts if they have too much inventory.

Ontario is still tackling its housing crisis. 

Since October 25, 2022, the Non-Speculation Tax rate has increased from 20% to 25%. As home ownership becomes more and more out of reach, foreign real estate is eating into Canadians' buying power. It is intended to discourage foreign speculation in Ontario by making it harder to buy property.

As a result of these steps, both near-term solutions and long-term commitments will be made to provide more affordable housing options to Ontario families based on recommendations from the Housing Affordability Task Force and the first-ever Provincial-Municipal Housing Summit.

By limiting relief eligibility to newcomers who commit to stay in the province long-term, the provincial government is also eliminating loopholes.

In August, there were a little more than 5,600 home sales, down 34.2 percent year-over-year, according to the Toronto Regional Real Estate Board (TRREB). Whether higher interest rates or falling prices, prospective homebuyers are weighing current conditions.

There has been a noticeable slowdown in price growth. A year ago, the average sales price of all homes combined was $1,079,500, up just 0.9 percent.
TRREB also pointed out an important point: "The average selling price also rose slightly month-over-month, while the HPI Composite dipped compared to July.". A higher share of more expensive home types sold in August was indicated by a monthly increase in the average price versus a dip in the HPI Composite."

Detached

• Sales: -26% to 511 units
• Average Price: -1.7% to $1,648,209

Semi-Detached

• Sales: -29.6% to 159 units
• Average Price: -7.3% to $1,127,429

Townhouse

• Sales: -44% to 182 units
• Average Price: +0.4% to $913,410

Condo

• Sales: -40.6% to 1,028 units
• Average Price: +2.6% to $736,940

There has been a mixed supply. In August, there were 10,537 new residential listings, down 0.7% from July. However, active listings increased by more than 62 percent to 13,305. Toronto's real estate market has also seen robust new home construction activity, according to CMHC data. To 4,535 units, housing starts grew 12.55 percent in August. The number of units under construction as of August has increased nearly 4.5 percent from October of last year.
 

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