TD's Burleton says case for Bank of Canada rate hike 'not that compelling'

Markets are pricing renewed Bank of Canada rate hikes alongside further tightening by the U.S. Federal Reserve, but TD deputy chief economist Derek Burleton says investors may be getting ahead of themselves.

**Derek Burleton, vice president and deputy chief economist at TD Bank**

“Our view is that the case for hiking is not that compelling,” Burleton said during the opening keynote at MortgageFest Canada in Toronto on Wednesday.

Burleton said markets are assuming that if the Fed hikes, Canada will have to follow, but pointed to Bank of Canada Governor Tiff Macklem’s comments earlier this week that the central bank will do what’s best for Canada.

Some market forecasts are pointing to as many as four quarter-point hikes in Canada, an outlook Burleton believes is too aggressive. “I think the Bank of Canada will sit on its hands,” he said.

TD’s latest quarterly forecast, published Sept. 17, argues the market is overplaying its hand in pricing several additional rate hikes by the Bank of Canada.

An inflation gap keeps the Bank of Canada on the sidelines

Burleton said the Fed, which raised rates by a quarter point last week, has been the biggest single driver of rising bond yields.

He said U.S. two-, five- and 10-year yields have climbed about 100 basis points since the start of the war with Iran in February. Since then, yields have been driven higher by rising oil prices, inflation expectations and bets on further Fed hikes.

While markets expect as many as three more Fed hikes, TD expects just one, in October.

“This is not a typical hiking cycle where it’s up and up and up and up,” Burleton said. “This is more about taking back some of the cuts from last year.”

Canada has imported some of that pressure. Five-year Government of Canada yields have risen almost a percentage point from their February lows, while 10-year yields are up about 70 basis points.

“This is translating, as you all know, into higher mortgage rates,” he said. “We are seeing it gradually work its way through the system.”

But Burleton said inflation looks very different in the two countries. South of the border, core inflation remains around 3%, compared with closer to 2% here at home.

“That is a big gap, and that is very important because the Bank of Canada and the Fed are targeting 2%,” he said, adding that higher oil prices could drive inflation higher, but not dramatically. “We have excess slack in our job market, we have an economy that still has room to grow, so we don’t think there’s really a case for the Bank to raise interest rates.”

Still, Burleton cautioned that a hold is far from guaranteed. TD’s baseline scenario is that the Bank of Canada stays put, but he put the odds of that at roughly 50%, noting that a single bad inflation reading could force the Bank to move. His alternative scenario calls for one hike and a maximum of two.

Trade war trims the growth outlook

TD downgraded its forecast this week after new U.S. tariffs that Burleton said will hit about 5% of Canadian exports particularly hard.

The bank cut its outlook for next year by about 0.3 percentage points, which still leaves growth in the mid-1% range, a notable improvement from this year.

Industries facing the steepest tariffs, including steel, aluminum, copper and lumber, account for about 10% of exports. Most Canadian exports, however, still benefit from tariff carve-outs.

Burleton, however, said he doesn’t expect a trade deal before the U.S. midterm elections and that one may not materialize for the rest of the Trump administration.

“What we do assume in our baseline is existing tariffs remain in place, and it does keep growth down a little bit lower,” he said, adding that tariffs are “not hammering our economy.”

Housing has found its floor, but recovery will be slow

Ontario’s housing market has endured four difficult years since the pandemic buying frenzy, but Burleton said it could have been much worse, thanks in part to the broker community.

“When I look back at four years of cooling, we got through the mortgage cycle as an economy as best we could, thanks to some of those in this room working with their clients and getting over the hump,” he said.

“We’ve seen a correction of more than 20% in prices, and we’ve seen some affordability improvement,” he added. “I think the bottom is here, and I think now we can look for the next phase.”

In Ontario, prices were down about 3% year over year in recent months, Burleton noted, while cautioning against expectations of a sharp rebound.

“What I don’t get too excited about is any kind of real tailwind that’s going to take the market up sharply,” he said. “It’s going to be a fairly flat outlook for sales and prices.”

Burleton said the near-term rise in yields remains a headwind, prompting TD to push back its expected recovery in sales and prices. TD now expects five-year yields to begin easing next year. “It’s going to take a little longer to get there,” he said.

Burleton described the investor market as “really quite soft right now,” with no reason to expect a quick rebound. He said surveys continue to show pent-up demand among millennials, but rising living costs, gas prices, economic uncertainty and higher yields are keeping would-be buyers on the sidelines.

Burleton said the recovery will vary by housing segment, with the condo market still needing to work through excess supply and potentially not recovering until 2027 or 2028. The semi-detached and detached segments, however, are “a completely different story,” with prices already stabilizing across the GTA.

On the national level, TD expects mortgage volumes to grow by about 4% to 5% over the next two to three years, which Burleton described as “moderate, sustainable, healthy.”

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