A Possible Pause in Interest Rates and the Impact on Housing Markets

On April 12, 2023, the Bank of Canada is set to announce whether it will increase interest rates. The decision has to be announced in mid of the banking crisis in the US. Two US banks have collapsed, prompting government agencies to take emergency measures to backstop the financial system. The collapse of the banks has raised concerns about the housing market and could force central banks to stop interest rate hikes. 

The Canadian economy has been flat in the fourth quarter of 2022, with weak economic growth expected for the next couple of quarters. The Bank of Canada has projected that inflation will decline to around 3% in the middle of the year. The labour market remains tight, with rapid employment growth, the unemployment rate near historic lows, and high job vacancies. Productivity is declining, but wages continue to increase at a rate of 4% to 5%. Inflation decreased in January to 5.9%, but still, the prices for food and shelter are high.  

The recent banking crisis is happening because the bank holds billions of dollars in bonds and treasuries. This is normal for most banks as it is a safe investment. If interest rates increase, the value of bonds, including Treasuries, is directly related to interest rates. Therefore, if a bank holds a large amount of Treasuries and other bonds, the value of its holdings will be impacted by changes in interest rates. The collapse of Silicon Valley Bank, in particular, was due to its customers, mainly tech start-ups and other tech-centric companies withdrawing their deposits, forcing the bank to sell a portion of its bonds at a steep loss.

The collapse of the banks and the weak economic growth in Canada have led to concerns about the housing market. According to a recent report by Oxford Economics, the global risks of housing market crashes spiralling into banking crises are now much higher than historical norms. Using a banking sector risk tool that measures 35 macroeconomic and financial indicators, Oxford suggests that up to 16% of major economies have an 18 to 20% chance of suffering a housing crisis within the next three to five years, compared to a historical average of just 2%. Canada, Iceland, the Netherlands, Sweden, and Denmark are among the five countries most at risk. In addition, the cost of imported goods for Canadians can go up with weaker currency, which can further increase inflation.  

Speculations are high that the Bank of Canada is expected to pause the interest rate on April 12, 2023, due to concerns about the housing market and the collapse of US banks; interest rate changes will impact the bank’s bond holdings’ value. Also, higher interest rates will weaken the currency and increase the cost of imported goods for Canadians, adding to inflation pressures.