We always used to say that when I was governor when we didn't know what was going on

David Dodge

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Here's where David Dodge thinks the economy and the central bank are heading next Back to video

“They said the right thing that where we go from here is data-dependent,” Dodge said in an interview. “We always used to say that when I was governor when we didn’t know what was going on. It’s the right thing to say.” 

Dodge made the case in the report that decades-high price pressures would continue to abate, which should allow the Bank of Canada to halt its policy rate hike at 4.5 per cent. 

“The impact of what has already been done in 2022 will really start to have an impact by the end of the second quarter or during the second quarter of 2023,” said Dodge. “I think this also aligns with analysis we’ve already seen from the Bank of Canada, that prices and margins will respond to the tightening that has already taken place by sort of the middle of the year, but certainly by the end of the second quarter.” 

The outlook expects that inflation should return to the central bank’s two per cent target by the end of 2024, but the Bennett Jones team is wary of uncertainties stemming from China’s wavering zero-COVID policy and the impacts of the Russian invasion of Ukraine. At that point, Bennett Jones projects that the economy will grow by two per cent. 

The Bank of Canada has already raised interest rates a total of four percentage points over the course of the year, bringing the trend-setting rate up to 4.25 per cent. The aggressive rate hike campaign came in response to decades-high inflation pressures, which reached an annualized pace of 6.9 per cent in October. 

With excess demand, a strong labour market and a low unemployment rate (5.1 per cent in November), the authors of the outlook noted that the Canadian economy does not appear to be slowing down. This is partly because it takes months for higher interest rates to affect demand, through lost jobs, strained business revenues and stagnating output. 

The one segment of the economy that has been rapidly reacting to rising rates has been housing, with prices in cities such as Toronto and Vancouver falling precipitously from their peaks. Dodge acknowledged that as rates rise, the first casualties will be the recent homebuyers who bought at the margins during the pandemic with high leverage. 

“Some of those who’ve gotten themselves on the edge in 2021 may be in trouble,” Dodge said, adding that the number of mortgage holders who will hit the wall financially should be relatively low. “It’s very tough for those individuals that actually lose their houses. They’re going to be relatively few, and if you can survive for a year or 18 months, the likelihood is that in 18 months, the five-year bond rate will be lower than it is today.” 

The full brunt of interest rate effects aren’t expected to hit until 2023 when the Bank of Canada projects economic growth to slip to 1.5 per cent from 3.25 per cent in 2022. 

Bennett Jones’ outlook emphasized uncertainty as the key theme heading into the new year, particularly due to the conflict in Europe.  

Dodge said the outlook assumes volatile prices caused by the war will roughly stabilize by next summer and the rate of inflation should ease. 

“But that’s truly uncertain,” Dodge said. “Assuming we’re right about all that, then it’ll be a judgment call for the Bank of Canada, I think, whether they go up at all, go up by one more quarter of a point or maybe even as much as two quarters of a point. But I think we’re sort of in that range: zero to a quarter, I think is kind of where we are.” 

• Email: shughes@postmedia.com | Twitter: StephHughes95