Where are interest rates going in 2023?

When looking at the Bank of Canada’s 2022 rate increases, Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, says that “ it's the most aggressive rate hike cycle in a generation.”

And with another 25 basis (0.25) point rate hike anticipated this month, it may appear that things aren’t going to ease up any time soon. Another expert also agrees with Reitzes’ assessment.

“We do think that they're going to need to hike to really sort of cement this cooling force on the economy,” said Leslie Preston, a managing director and senior economist at TD Bank.

The rate increases can be hard on households as they deal with higher mortgage and debt payments, but they help to curb inflation.

“It takes a long time for the impact of monetary policy to really have its full effect on the economy,” said Reitzes, noting that we are starting to see the effects of last year’s hikes.

The latest Consumer Price Index Summary shows that inflation has dropped to 6.3%, after reaching a 40-year high of 6.8% in April 2022.

Preston is encouraged by the news, but notes that inflation is still too high.

“The Bank of Canada wants inflation to come down to the one to 3% range,” said Preston. While we haven’t hit that range yet, we are making progress.

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Housing market forecast 2023

In certain markets, home prices have become uncontrollable. When mortgage rates were low, individuals were willing to take on higher loans and purchase more expensive houses.

“We certainly saw the most immediate impact of higher interest rates on cooling the housing market,” said Preston.

Reitzes anticipates that they will continue to see home prices decrease until mid-year, but at a slower pace than they did in 2022.

For potential homebuyers, this is good news. If you are looking to upgrade your home, you will potentially be able to get more home for your dollar this year.

While home prices will drop, Reitzes also expects the number of home sales to remain about level throughout the year. Your current property might not sell as high as it would have in 2021, but you will still likely be able to get some profit from the purchase.

For first-time homebuyers, a settling of prices means less competitive bidding, and you might have more negotiating room than you would have before.

Be prepared, though: if you’re anticipating making an offer on a home, you’ll also need to be ready to make higher mortgage payments. You can reduce the size of your mortgage by making a larger downpayment, but to do so you’ll need to have the money available to you.

If you’re a first-time homebuyer, you may consider taking advantage of the government’s Home Buyers’ Plan (HBP). This allows you to tap into your RRSP and withdraw money tax-free to help with the downpayment.

Starting this year, prospective homebuyers can also put their money in a tax-free First Home Savings Account (FHSA). This account allows you to contribute up to $8,000 a year, up to $40,000 total, that you can then withdraw tax-free to use for a home purchase. Similar to an RRSP contribution, money you deposit into these accounts helps lower your annual income when it comes to tax time.

Recession watch

“We do have a recession in the forecast, the timing of it, though, is becoming a little bit more uncertain,” said Reitzes.

One sign of a recession is reduced job growth. The fact that there have been strong employment numbers may allow for a shorter recession, or one that doesn’t have as much of an impact.

When looking at job growth, Reitzes points to the fact that 100,000 jobs were added in December, the second time that number was reached in three months. While he observes that such growth isn’t sustainable, it is quite impressive, and is a good sign of economic strength.

However, Preston feels that there will be a rise in unemployment in the coming months as the labour market slows. This will be driven by the higher interest rates weighing on consumers and businesses, in turn softening demand for products.

“A period of very soft growth is required to bring inflation back into more manageable levels,” said Preston.

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The economy at large

All levels of government are doing what they can to slow down inflation while fending off a recession. They want to keep businesses growing, and ensure consumer needs are met.

“We've seen a really good run for governments, provincially and federally,” said Reitzes, “and what we've seen is the deficits have narrowed pretty nicely on stronger revenues.”

“If the economy can avoid a recession, and nominal growth [growth that includes inflation] stays in positive territory, that suggests a further positive trajectory for deficit profiles, both federally and provincially.”

This is good news for consumers, as it means that the Canadian dollar could strengthen due to international demand for Canadian goods.

“We've been benefiting over the past year from higher commodity prices, particularly oil,” says Preston. “That's more money flowing into Canada for our oil and petroleum product exports.”

Optimism for 2023

While 2023 may feel like it’s off to a bumpy start, as we weather through the winter we can remain hopeful for the future.

“I think the resilience in the data has been very impressive,” said Reitzes.

As the Canadian economy continues to strengthen and grow, take time to consider what positive opportunities lay ahead.

Inflation is starting to settle, which means you’ll be spending less money on everyday goods. Lower house prices can make the market more affordable to new homebuyers, and let you put down a greater downpayment on a house.

Even though a recession may be a temporary setback, the economy will come through it stronger on the other side.

“We've just been through a global pandemic, and before that, we went through a global financial crisis,” said Preston. “The Canadian economy has weathered both of these very large shocks relatively well.”


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James Battiston Content Specialist

James Battiston has been writing personal finance articles for various websites for the past four years. He has a background in film and TV production, and can often be found consuming far too much coffee.

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