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4 Jul

Most economists think rates should be held steady

General

Posted by: Kimberly and Cindy Walker

The Bank of Canada is unlikely to make any changes to interest rates when it meets in a week’s time and that is the right move according to a panel of economists.

Twelve of the 14 economists thought a hold at 1.75% would be the correct strategy while 2 believe there should be a rate cut.

However, when rates do change, there is a majority in favour of Governor Poloz and his team deciding to cut interest rates rather than raise them, whenever that move happens to be.

The panel was convened by comparison site Finder.com with 93% forecasting a rate hold on July 10 and 86% agreeing that is the right thing to do.

“Key housing markets are showing signs of recovery, and economic growth appears set to speed up notably in the second quarter. The external backdrop remains highly uncertain, which, balanced against domestic strength, suggests the current interest rate setting is about right,” said TD Bank’s Brian DePratto.

But Stephen Brown, senior economist at capital Markets, would like to see a cut next week, although he concedes that is not likely.

“Core inflation is a lagging indicator so the recent rise doesn’t tell us about current conditions. Much of the rebound in GDP growth in Q2 reflects the reversal of temporary factors that weighed on growth in Q1. The business surveys paint a gloomy picture and we think that Bank would do well to follow the Fed’s playbook by enacting some insurance cuts,” he said.

Future cut

Most of the panelists think there will be a cut but not yet.

“It is best to hold onto that option until there are clear signs of a recession. The Fed in the US has indicated that they may begin cutting their key target rate later this year. The Bank of Canada should watch their decision closely,” said Moshe Lander, economics professor at Concordia University.

Mortgage stress test

Finder’s survey also asked economists about the unintended consequences of the mortgage stress test with 70% believing the test has contributed to rising rent prices and 40% believe the stress test has significantly disadvantaged first home buyers.

“While the stress test aims to protect consumers, by ensuring they can afford their mortgage payments when rates eventually do rise, some economists think it could disadvantage first-time home buyers who no longer qualify for a mortgage and must try and save up for a bigger deposit, while still paying rent,” said Angus Kidman, global editor-in-chief at Finder.