News & Resources

CIBC's Tal on Inflation and Interest Rate Expectations

May 28, 2021
6 mins
mortgage forecasts.jpg

Hundreds of thousands of Canadians are making mortgage decisions based on the Bank of Canada’s forward guidance. That being, that it won’t lift interest rates until the second half of 2022.

But, until recently, the Bank had forecast the first hike in 2023.

This has a lot of people wondering how much faith they should really put in BoC projections.

I interviewed eminent CIBC economist Ben Tal at an M3 Group conference last week. Here’s what he said about it:

“My advice is, what the Bank of Canada is telling you is not written in stone. The Bank of Canada, like all of us, they simply don't know. The fact that it's the Bank of Canada, so what? They are guessing like you and I are guessing. And the fact that they are saying so doesn't mean that it will happen ... Just two to three months ago, the Bank of Canada was telling us, ‘We are not touching interest rates until 2023’ ... Then in the last meeting they say, ‘You know what, we were just joking...It actually will be the end of 2022.’”

“And who knows if two months from now, they will say, 'you know what? Remember the last joke? We were just joking again.'"

The fact is, you have an economy "driving faster than the speed limit," he says. "I think that the risk of keeping...in [a] variable [mortgage rate] is rising. There's no question about it.”

“These are emergency interest rates. When the economy is rising by 6-7% a year, it's not an emergency.”

“If inflation takes off...and the Bank of Canada and Fed try to chase inflation because they were late [in tightening monetary policy], they will raise interest rates very, very quickly."

The market is now expecting the BoC to increase rates “a full year before the Fed," Tal adds.

And the U.S. economy is the one to watch because our dependence on the U.S. will rise, not fall, due to deglobalization, he says. The Americans just saw their biggest year-over-year jump in inflation since the 1990s. And it comes as Democrats lay out plans for further enormous government spending.

That said, Tal doesn’t think we’re in danger of core inflation shooting over 4%, which Canada last endured in 1990. That’s despite Ottawa running its biggest deficit (vis-a-vis GDP) since World War II.

“Now we have inflation targeting, unlike the 40s where they just let inflation go up..."

"How do you fight inflation? You raise interest rates."

Today's Featured RatesUpdated 13:09 ET on Jun 19, 2021

Rates are based on a $300,000 mortgage.

card image
0.95%
Term
3 Yr Variable
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Sep 19
card image
0.99%
Term
5 Yr Variable
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Oct 19
card image
1.67%
Term
5 Yr Fixed
Loan to value
80.01% to 95%
Insurance
Insured
Rate held until
Aug 05

But the BoC has to act before it’s too late, Tal warns. “What counts at the end of the day is inflation expectations.” If people think inflation is rising faster than the central bank lets on, they’ll buy more now and ask for pay raises now, and it risks becoming a vicious cycle.

"We were wired to predict 2% [inflation] because it has been 2% forever ... If you or me start to believe it will be 3%, that's significant!"

“When you start early [to hike rates]), it’s a good thing," explains Tal. “But when you wait and wait and wait and say, ‘You know what, [inflation is] temporary … It's short-lived, it's short-lived, it's short-lived ... I'm sure that people in the 1960s, every month, said that it's short-lived, it's short-lived — until they realized that it's not short-lived."

Canada’s bond market is currently “pricing in no more than 2.5% [core inflation],” he says. If it turns out that inflation is running hotter than that, Canada’s 5-year government yield will surge, taking mortgage rates up with it.

But ultimately, Tal doesn’t think we’ll see runaway rate increases like the 60s, 70s and 80s.

“If you raise interest rates by 200 basis points now, it's like raising 400 basis points 10 years ago ... It's double the impact,” Tal explains.

“Maybe the disease is also the cure,” he says. “Maybe [Canadians'] increased sensitivity to higher rates will prevent interest rates from rising to the sky.”

Rob McLister

Rob McLister has been informing mortgage consumers and professionals since 2007. In that time, he’s written more than 2,500 mortgage stories for publications ranging from the Globe and Mail — where he presently serves as mortgage columnist — to the National Post, Maclean’s, Canadian Mortgage Trends and RateSpy.com. Regularly quoted throughout the media, Rob is a committed advocate of greater transparency in the mortgage industry. He’s also been a vocal consumer advocate for more sensible mortgage regulation. In 2011, he launched two mortgage fintechs: mortgage comparison website RateSpy.com and digital mortgage broker intelliMortgage Inc. The former is the go-to source of Canadian mortgage news and the only site comparing all publicly advertised prime mortgage rates. The latter is Canada's leading online mortgage provider for self-directed borrowers. Both companies were acquired in 2019 by RATESDOTCA Group Ltd.

Latest mortgage articles

The Side Effects of Record Mortgage Activity
We’ve been writing about mortgages for years and have never seen the mortgage growth we’ve seen in 2021.
Three-Quarters of Hopeful Homebuyers Can’t Afford to Buy
Canada’s dramatic rise in home prices over the past year may be easing, but that’s little comfort for hopeful buyers who are shut out of the market.
The Spread Between Fixed and Variable Nears a Decade-High
The divide between average fixed rates and their floating-rate counterparts is now approaching the largest it's been since August 2011, the last time it was over one percentage point.