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Photo: Brent Lewin/Bloomberg via Getty Images.
Photo: Brent Lewin/Bloomberg via Getty Images.

National Bank is cautiously optimistic interest rates will hold steady — and eventually drop — in 2023.

That’s according to the institution’s February 14 webcast, National Bank Outlook 2023: How Bad Will it Be?

Despite the ominous title economists argued that all signs point to a soft landing by mid-year, with interest rates remaining in their current position of 4.50% through the first half of 2023, followed by a modest reduction before year’s end.  

The Bank of Canada raised interest rates by 25 basis points in late January while also indicating that it was going to put a pause on further hikes.

“If we are right on inflation, we would expect the Bank of Canada to be in a position to lower rates in the second half of this year,” said the National Bank of Canada’s Chief Economist and Strategist Stéfane Marion. “Not by much, but by 50 basis points, which would limit the payment shock going forward for people renewing their mortgages.”

That outcome, adds Marion, depends on myriad factors ranging from the war in Ukraine to U.S. labour market trends to Chinese COVID policy, and more.

The gradual and delicate bounce-back narrative also applies to housing prices themselves. According to the National Bank’s projections, it’s unlikely Canadians will experience a fate similar to that of the American housing market during the 2008 recession, though prices are likely to continue trending downwards in the coming months.

They predict another 5% or 6% slide this year — on top of the 10% reduction since last year’s peak — with the fall cushioned by a planned immigration boom.

Canada’s population grew by an unprecedented 850,000 last year, most of which came by way of relatively young and educated immigrants, who entered an economy with an historically low unemployment rate. The federal government has also announced plans to increase immigration by nearly half a million per year in each of the following three years.

“If you have strong population growth, in a cohort where people are employed, that means household formation, which limits your downside on home prices,” said Marion. He explained that the immigration boom, coupled with a cautiously optimistic economic forecast and a potential reduction in interest rates, could reverse the trend of falling home prices before the end of the year.  

In the meantime, however, National Bank acknowledges that rising rates have put Canadians in a financial pinch. Roughly one-third of mortgage holders have a variable rate, compared with just 5% of American borrowers.

“If you look at the fixed rate market, which is 70% of the total, the good news is at least we’re seeing some stability there, but there will be a payment shock,” Marion said. “We assess that it will be roughly equal to 1% of disposable income this year.”

Despite those rising costs, delinquency rates are still historically low, which he credits to the savings Canadians accumulated during the pandemic. The other reason why the bank isn’t worried higher interest rates will drag the economy into a deep recession is the recent surge in job creation.

Canada has also been relatively insulated from the skyrocketing energy prices seen in Europe and to a lesser extent the United States since the outbreak of the war in Ukraine.

The news offers some hope for Canadians fearing further declines in their home values and further increases to their mortgage rates.

Though nothing is for certain, National Bank is optimistic that the worst is almost over for Canadian homeowners, with interest rates and home prices both expected to reverse course later this year. 

Cover Photo: Brent Lewin/Bloomberg via Getty Images.