Bank of Canada likely on hold for rest of 2019: Macquarie's David Doyle
Canada should be prepared for another round of weakness in the housing market as early as next year, according to one Canadian economist.
David Doyle, North American economist and Canadian markets strategist with Macquarie Group, said that while the Canadian housing market appears to be stabilizing, a wave of five-year fixed mortgage rate resets set to take place next year will spark new risks for the economy.
“Where I get more concerned about housing actually is, as we move into 2020, is that the rate reset of five-year fixed rate mortgage holders moves higher again, 75 to 80 basis points,” Doyle told BNN Bloomberg’s Amanda Lang Monday. “So that for me is a risk for 2020, that potentially, there’s another bout of weakness coming for housing across the country.”
While the same reset scenario occurred in 2018 and the Canadian economy “muddled through,” it took place after just a year of robust activity, Doyle said. The next wave, however, may come at a time when the economy is already slowing down.
“If the same thing happens in 2019 and you have a subdued growth level coming through, the question is, what does that mean for 2020? And I think there are some downside risks associated with that,” he said.
Ahead of the Bank of Canada’s interest rate decision Wednesday, Doyle said he agrees with Governor Stephen Poloz holding steady, given how the economy still faces several risks.
“There’s all these downside risks out there in part due to global trade tensions, but also because of what’s going on in the housing market,” Doyle said. “So I think for them to be in a wait-and-see-mode right now is appropriate.”
A necessary condition for the Bank of Canada to justify a rate hike would be if the energy sector – which has struggled amid low Canadian oil prices and regulatory uncertainty – rebounded, according to Doyle.
“If you think the next move from the Bank of Canada will be a hike, a big part of that would have to be some strength from the energy sector. It’s such a big swing factor in our growth, it would have to be something like that that causes enough momentum to justify a hike.”