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A 50 BASIS POINT RATE HIKE HAPPENED. WHAT NOW?

A Recap of Manulife Investment Management’s Economic Update on April 14, 2022

Jason Wang, CFA

On April 14, the day after the Bank of Canada announced an interest rate increase of 50 basis points (the most significant single rate hike in 22 years), CFA Society Toronto hosted a webinar in which Frances Donald, the Global Chief Economist of Manulife Investment Management, gave an economic update. Though it may appear that the webinar was called as an “emergency meeting” because of the rate hike, this pre-scheduled webinar was a timely discussion of the current economic situation and the near-term outlook.  

Professionals in the investment industry and average consumers alike are seeking answers to many questions: How high will inflation go? Will there be more rate increases in the future? How do these increases impact the real estate market?

The speaker, Frances Donald, focused on providing data, letting indicators and metrics guide the audience through understanding what is happening.

Not All Inflation Is Created Equal

Donald made the enlightening point that inflation can have different underlying causes, and the world has moved on from “COVID inflation” to “conflict inflation.” What is “COVID inflation”? The COVID-19 pandemic caused prolonged labour shortages in many sectors and lockdowns in manufacturing domestically and internationally (including in China, a major global manufacturing hub). Container ships and trucks were not moving goods at the scale they used to be. A global shortage of semiconductor chips impacted the production of downstream industries. As a result, scarcity of many consumer products pushed prices up.

Subsequently, at the beginning of 2022, when parts of the world were moving into the endemic stage and COVID-19 no longer seemed to be a primary concern, conflict broke out. Following Russia’s invasion of Ukraine and the West’s sanctions against Russia, energy prices increased rapidly to some of the highest levels since the oil crash of 2015. Because it takes energy to make products, transport goods, and heat homes, consumers are experiencing continued increases in prices of everyday items.

More Hikes Down the Road?

Donald analyzed the narratives of the Bank of Canada in detail, particularly the Bank’s choice of words that it will use the policy interest rate “forcefully” to tame inflation.1 She believes we can interpret the word “forcefully” to mean another increase of 50 basis points in June.

Here, she pointed out a “problem.” In contrast to the typical inflation we see in economic expansion, this time, inflation is supply side and global, so she doubts that the Bank of Canada’s interest rate move will be effective in taming inflation. “[Another rate hike] is not going to do much for inflation for Canadians this month or next month or the one after that. It is going to lower growth.”

Impact on the Housing Market

Could the central bank’s rate decision cause a near-term housing correction? In an interview with CBC News, Donald said, “Canadians should get ready for house price activity to moderate.” However, she explained to journalists why she is not worried: “A lot of us remember what we paid for our house, not the month-to-month value of it.” 2

She echoed this sentiment during the Society webinar and pointed out that a potential housing market correction is not cause for concern. “A 20 percent correction would put us where we were last year,” she said, referring to the recent rapid appreciation in some major metropolitan areas, including Toronto.

In the meantime, Donald said Canada’s housing market has moved beyond a bubble and is now a “housing affordability crisis.” When a whole generation, as well as many new immigrants, are being shut out of the housing market, talent could eventually leave Canada. With birth rates low and Canada reliant on immigration for population growth, this brain drain could hurt the country’s population growth and productivity growth in the long run. She emphasized that “we need long-term structural solutions to the Canadian housing market crisis.”

At the end of the webinar, by engaging with the audience in the Q&A session, Donald reiterated her point that Canada needs to act on housing affordability. The next few months will be interesting to watch and a test of whether the central bank’s rate movements could tame inflation. CFA_Toronto_RGB Milly

1 Macklem, Tiff. “Opening Statement by Tiff Macklem, Governor of the Bank of Canada, Press Conference Following the Release of the Monetary Policy Report.” Bank of Canada, April 13, 2022.

2 Donald, Frances. “Rate Hikes Alone Won't Tame Inflation, Expert Says.” Interview by Suhana Meharchand. CBC News, April 13, 2022. Video, 3:54.

Jason Wang, CFA, MBA, is the Chief Risk and Compliance Officer at Synergy Credit Union. He also sits on the advisory board of Marble Financial, a Vancouver-based fintech. Jason has extensive experience in risk management, analytics, and compliance in the investment and retail banking industries.
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