Get ready for steep rate hikes in 2011: economist
According to Carlos Leitao, chief economist at Laurentian Bank Securities, when the Bank of Canada does start raising its key policy interest rate in either late 2010 or early 2011, Canadians should brace for "aggressive" increases of up to a percentage point at a time.
The Montreal-based economist said he believes Mark Carney, the Bank of Canada governor, will be able to keep his June 2010 promise, based on the amount of spare capacity in the economy and continuing job losses that are likely to peak early next year.
The Bank of Canada is likely to begin hiking rates after unemployment peaks (in early 2010) and before inflation hits the preferred 2% target (sometime in mid-2011).
"An aggressive tightening – rather than a gradual one -- will be necessary because rates are extremely low," Mr. Leitao said in LBS's weekly note to clients released Wednesday. "A ‘measured pace' would not be appropriate to ‘normalize' rates when the starting point is virtually zero."
This prediction is based on what is considered to be one of the key causes of the financial crisis, that the U.S. Federal Reserve kept its key policy rate too low for too long. When it did begin raising rates in 2004, the Fed opted by gradual increases of 25 basis points – not nearly aggressive enough, in retrospect, to cool down the white-hot housing bubble that resulted in the financial market meltdown almost a year ago.
Mr. Leitao said should the Bank of Canada take a similar path like the Fed did earlier this decade, its key policy rate would be at just over 3% by the end of 2011.
The Bank of Canada releases its latest interest-rate statement on Thursday, and analysts are near unanimous that it is unlikely to contain much change. The central bank will leave its target rate unchanged and reiterate its commitment to leave it there until mid-2010.
Whether we will follow in the footsteps of the US Fed remains to be seen. The recession was much deeper in the US than it was here and was not as bad as what was predicted.
What is being said here indicates to me that people who are considering making a move whether as a first time buyer, someone looking to upgrade or downsize or a seasoned investor will be wise to do so between now and early next year. Buyers will not want to miss out on locking into a low interest rate and sellers will not want to miss out on a great many buyers.