Economic Factors Affecting Rate Forecasts

The conflict between Russia and Ukraine is spiraling out of control and the effects of this conflict can be seen all over the world, even in Canada. The persistent inflation is changing rate forecasts on a weekly basis and forecasting interest rates in such circumstances does not provide conclusive results.

There are several economic factors that must be considered to provide accurate rate forecasts. However, considering the daily changes in some economic factors which are listed below, it would require sufficient time to ease the demands of Canadian citizens and give them some peace of mind.

• Oil Price are increasing on a daily basis
• Consumer confidence is decreasing leading to low purchasing power
• People are not able to add funds to their savings
• The tightening labor market
• Excessive housing-related expenses and exorbitant housing prices

When all these factors including are analysed, it makes it difficult for the average borrower to select a mortgage term with complete confidence. Furthermore, with increasing inflationary pressure, the quarter-point rate increase by Bank of Canada will be a whisper as compared to other economic factors.

The governor of Bank of Canada said that rate hikes were required in order to “keep inflation expectations well anchored and to limit the broadening of inflationary pressures so that inflation falls back as supply disruptions ease.”.

Although the Bank of Canada is making efforts to reduce the pressure of inflation in the country, the global economy is sending a different message. Because of Russia’s attack on Ukraine, the energy prices have spiked sharply. Many Canadians have not yet invested in electric vehicles because they did not predict such high oil prices. Furthermore, the global price of foods is also expected to surge because grain and fertilizer are also suffering a significant shortage.

In addition, Ukraine has lost all of its production facilities and the economic sanctions on Russia have added significant disruptions to the global supply chain. The global message being received which should be understood by Canadians is that the inflation will continue to rise. However, this indication is not only coming from a global level because last week Canadian banks reported a new surge in lending, pouring more money into the country’s overheated economy.

In recent quarters, the loan books of large banks grew which is attributed to surging demands for mortgages amid the hot housing market. Other loan categories lagged behind, and because of the Omicron variant, many Canadian provinces temporarily closed their operations in order to curb the spread of the virus. Nevertheless, the first quarter realized a sharp increase in loans.

Mortgages also increased sharply, but business lending was almost as strong. Commercial loans given to Canadian companies were increased by 21% for National Bank of Canada, 19% for CIBC, and 10% for BMO. Personal lending also perceived signs of flourishment because of increased consumer spending. The Royal Bank of Canada increased their credit card balances by 3.5% and household savings were boosted by the government because of the stimulus programs that were announced during the pandemic.

A well-known Canadian economists Eddy Ng, the Smith Professor of Equity and Inclusion in Business at Queen’s University in Kingston, Ont., highlighted, “The conventional wisdom is to raise interest rates because that will make it more expensive for consumer and businesses to borrow, and hopefully that would stop the consumption,”. However, he added, “I think that’s a fundamental misreading of the economy,”.

The issue raised by Ng was that there is a supply shortage in the country and raising the cost of borrowing will only make it difficult for businesses to contribute to filling the supply gaps. Furthermore, the impact of surging interest rates on mortgages is that although the price of houses is increasing, this increase is counted towards asset valuation and are therefore, not accounted for in inflation. However, the higher level of interest paid on large mortgages are accounted for directly into the CPI as part of Statistics Canada’s shelter component.