{"id":2108,"date":"2023-05-10T13:00:37","date_gmt":"2023-05-10T13:00:37","guid":{"rendered":"https:\/\/www.rbc.com\/en\/economics\/2023\/05\/10\/crunch-time\/"},"modified":"2025-10-15T19:30:31","modified_gmt":"2025-10-15T19:30:31","slug":"crunch-time","status":"publish","type":"post","link":"https:\/\/www.rbc.com\/en\/economics\/financial-markets-monthly\/crunch-time\/","title":{"rendered":"Crunch time"},"content":{"rendered":"<h4>Highlights<\/h4>\n<ul>\n<li>Banks tightening credit standards amid financial sector turmoil.<\/li>\n<li>Lending slowdown to weigh on US and euro area GDP growth.<\/li>\n<li>BoC talking up tightening bias but expected to remain on the sidelines. <\/li>\n<li>This month\u2019s hikes by the Fed, BoE and RBA could be their last.<\/li>\n<li>ECB was later to start hiking and should be later to pause.<\/li>\n<\/ul>\n<hr \/>\n<p>Banking sector turmoil returned to the fore in late April with the collapse of another mid-sized US lender. A debt ceiling stalemate is also adding to concerns with Treasury Secretary Yellen warning the government could run out of money as early as the beginning of June. Markets have generally taken these risks in stride\u2014the S&amp;P 500 is little changed since the end of March despite the regional banking sub-index declining by a further 14% (it\u2019s nearly 50% lower year-over-year). Investors are taking some comfort from expectations that the Fed\u2019s latest rate hike will be its last. Aside from near-term bills impacted by debt ceiling drama, Treasury yields remain range-bound after falling sharply in the first half of March when banking worries first surfaced. <\/p>\n<p>While slowing inflation is allowing central banks to move to the sidelines, that doesn\u2019t mean the impact of policy tightening is at an end. We\u2019ve emphasized ongoing pass-through of higher interest rates to households in the coming quarters. Businesses, too, will increasingly feel the effects of tightening credit conditions as lenders become more restrictive, particularly in the US and euro area where banking concerns are most prevalent. We\u2019ve downgraded our growth forecasts in those geographies and continue to expect modest GDP declines in Canada and the US in the coming quarters, and sluggish growth elsewhere. Labour markets have remained resilient but we\u2019re starting to see cracks that will spread as economic activity gears down. For the central banks that are now hitting pause, that should keep them from acting on their tightening biases.<\/p>\n<h3 id=\"central-bank-bias\" class=\"anchor\"><span style=\"color: #004da4\"><b>Central bank bias<\/b><\/span><\/h3>\n<p><!-- Insert style at the beginning of code block --><\/p>\n<p><!-- Central Bank table starts here --><\/p>\n<div class=\"central-bank-table\">\n<!-- Headers --><\/p>\n<div class=\"col-wpr bg-lightblue mar-b-0 pad-tb pad-lr text-center eh-wpr\">\n<div class=\"col-4 flex\">\n<p class=\"h5 text-white\">Central Bank<\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h5 text-white\">Current Policy Rate<br \/>(Latest Move)<\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h5 text-white\">Next move<\/p>\n<\/div>\n<\/div>\n<div class=\"col-wpr table-border mar-t-0 pad-tb pad-lr text-center eh-wpr\">\n<!-- Block 1 CANADA --><\/p>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_Canada-Flag.png\" alt=\"\" width=\"626\" height=\"626\" class=\"alignleft size-full wp-image-42691 w-35 pad-r\" \/>BoC<\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">4.50%<br \/><span class=\"h5\">No change in Apr-23<\/span><\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">On hold<br \/><span class=\"h5\">until Q1-24<\/span><\/p>\n<\/div>\n<div class=\"col-12 text-center pad-t\">Recent BoC communications have maintained a hawkish tilt with Governing Council playing up its tightening bias. But with the economy losing momentum, we don\u2019t see the BoC coming off the sidelines.<\/div>\n<\/div>\n<\/div>\n<p><!-- Block 2 USA --><\/p>\n<div class=\"col-wpr table-border pad-tb pad-lr text-center eh-wpr\">\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_US-Flag.png\" alt=\"\" width=\"626\" height=\"626\" class=\"alignleft size-full wp-image-42709 w-35 pad-r\" \/>Fed<\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">5.00-5.25%<br \/><span class=\"h5\">+25 bps in May-23<\/span><\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">On hold<br \/><span class=\"h5\">until Q4-23<\/span><\/p>\n<\/div>\n<div class=\"col-12 text-center pad-t\">The Fed met expectations with another 25 bp hike in May but signaled it may pause tightening as soon as June. We see non-trivial odds of another hike but our base case is that the Fed is done raising rates.<\/div>\n<\/div>\n<p><!-- Block 3 UK--><\/p>\n<div class=\"col-wpr table-border pad-tb pad-lr text-center eh-wpr\">\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_British-Flag.png\" alt=\"\" width=\"626\" height=\"626\" class=\"alignleft size-full wp-image-42711 w-35 pad-r\" \/>BoE<\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">4.25% <br \/><span class=\"h5\">+25 bps in Mar-23<\/span><\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">+25 bps<br \/><span class=\"h5\">in May-23<\/span><\/p>\n<\/div>\n<div class=\"col-12 text-center pad-t\">Strong inflation and employment data caused us to add a final 25 bp hike to our Bank Rate forecast. We think the BoE will leave its options open after its May meeting but we see it moving to the sidelines thereafter.<\/div>\n<\/div>\n<p><!-- Block 4 EURO --><\/p>\n<div class=\"col-wpr table-border pad-tb pad-lr text-center eh-wpr\">\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_EU-flag.png\" alt=\"\" width=\"626\" height=\"626\" class=\"alignleft size-full wp-image-42708 w-35 pad-r\" \/>ECB<\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">3.25% <br \/><span class=\"h5\">+25 bps in May-23<\/span><\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">+25 bps<br \/><span class=\"h5\">in Jun-23<\/span><\/p>\n<\/div>\n<div class=\"col-12 text-center pad-t\">The ECB dialed back to a 25 bp hike in May but suggested further rate increases should be expected. We continue to look for two more 25 bp hikes with a terminal deposit rate of 3.75%.<\/div>\n<\/div>\n<p><!-- Block 5 AUSTRALIA --><\/p>\n<div class=\"col-wpr table-border pad-tb pad-lr text-center eh-wpr\">\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\"><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2025\/03\/Central-bank-bias_Australia-flag.png\" alt=\"\" width=\"626\" height=\"626\" class=\"alignleft size-full wp-image-42710 w-35 pad-r\" \/>RBA<\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">3.85% <br \/><span class=\"h5\">+25 bps in May-23<\/span><\/p>\n<\/div>\n<div class=\"col-4 flex\">\n<p class=\"h3 text-bold text-blue\">On hold<br \/><span class=\"h5\">until Q2-24<\/span><\/p>\n<\/div>\n<div class=\"col-12 text-center pad-t\">The RBA quickly reversed its April pause, hiking by 25 bps in May and leaving the door open to further increases. The flip-flop adds uncertainty to our forecast but we assume the RBA will be on hold from here.<\/div>\n<\/div>\n<p><!-- End of Central Bank table --><\/p>\n<h4 id=\"title4\" class=\"anchor\">Trimming growth forecasts as credit conditions tighten<\/h4>\n<p>US banks have cut back on business loans in the wake of financial sector turmoil, and the Fed\u2019s latest Senior Loan Officer Opinion Survey suggests credit conditions will continue to tighten for the rest of 2023. Mid-sized banks in particular\u2014a group that has seen several high profile failures since March\u2014are tightening standards due to concerns about liquidity, deposit outflows and funding costs. Lending standards for commercial real estate (CRE) tightened more significantly than commercial and industrial loans, with deteriorating credit quality and collateral values contributing to the former. A pullback in CRE lending\u2014where smaller banks are particularly active\u2014alongside deteriorating asset values remains a financial stability concern.<\/p>\n<p>Relative to other advanced economies, the US is less reliant on bank lending to fund business investment. But higher interest rates and volatile or declining stock markets have also made market-based financing less attractive, and bond and equity issuance has slowed to multi-year lows. US business investment in structures and machinery has been flat over the past year and with further tightening in the pipeline we\u2019ve reduced our capex forecast in the quarters ahead. Our GDP growth forecast has been lowered by a cumulative half percent in 2023 and 2024 though we still expect an impending US recession will be on the mild side.<\/p>\n<div id=\"everviz-5LQBeGyHi\" class=\"everviz-5LQBeGyHi\"><\/div>\n<p>Euro area businesses are relatively more reliant on bank funding, which has already retrenched in recent months. For a second consecutive quarter, the ECB\u2019s Bank Lending Survey showed the highest net share of banks tightening lending standards since the euro crisis. Lenders also expect to continue tightening in the near-term. A further slowdown in bank lending is expected to weigh on business investment in particular and we\u2019ve lowered our euro area growth forecasts for the second half of this year and 2024. But that isn\u2019t expected to keep the ECB from delivering further rate increases in the near term. The central bank\u2019s May policy statement implied multiple further rate hikes are needed to ensure monetary policy is sufficiently restrictive, consistent with our call for another 50 bps of tightening.<\/p>\n<h4 id=\"title2\" class=\"anchor\">Central banks to keep an eye on nascent housing rebound<\/h4>\n<p>Canadian home sales rose in February and March, the first back-to-back gains in more than a year, and regional reports suggest a further increase in April. New listings have been slower to pick up and there are few signs of distressed home sales despite a sharp increase in mortgage rates, although non-mortgage delinquencies have started to rise. With supply-demand conditions tightening, pricing has stabilized after a year of declines, and is beginning to heat up again in some markets. The US housing market is also showing signs of life, with resales up 3% in Q1 and one measure of home prices rising in February after seven straight monthly declines. But mortgage applications remain subdued, and on both sides of the border, homebuilding activity has yet to show a definitive turnaround\u2014although that would be consistent with its usual lagging relationship with the resale market.<\/p>\n<div id=\"everviz-TrFhEmhh0\" class=\"everviz-TrFhEmhh0\"><\/div>\n<p>With the Fed and BoC trying to slow overheating economies, we think any rebound in housing activity will be cause for concern. Residential investment, the most rate sensitive sector of the economy, acted as a significant drag on growth last year, subtracting half a percentage point from US GDP growth and record percentage point in Canada. A pickup in home sales and prices would see that headwind ease and could also support consumption through wealth effects and housing-related spending. But at this stage, with mortgage rates remaining elevated, we think any near-term rebound will be fairly limited. And the broader effects of past interest rate hikes\u2014driving debt servicing costs higher as more households renew mortgages\u2014is still flowing through into less rate-sensitive sectors.<\/p>\n<h4 id=\"title3\" class=\"anchor\">Canada\u2019s economy losing momentum; strike to hit Q2 growth<\/h4>\n<p>Canadian GDP was close to expectations with a 2.5% annualized increase in Q1, according to preliminary estimates. That\u2019s slightly ahead of the economy\u2019s potential growth, implying no further progress in reducing excess demand in the quarter. However, much of the Q1 increase came in January\u2014GDP was flat on average in February and March. That already suggests a loss of momentum heading into Q2 when economic activity will be dragged down by labour disruptions. By our math, a major strike by federal public employees in the second half of April will reduce that month\u2019s GDP by 0.3%. Notwithstanding a rebound in May as striking workers return, we\u2019ve trimmed our Q2 GDP forecast from -0.5% to -1.0% annualized. <\/p>\n<div id=\"everviz-x0q8EUhMH\" class=\"everviz-x0q8EUhMH\"><\/div>\n<p>Our updated Q2 forecast is well below the BoC\u2019s (pre-strike) call for a 1% annualized gain. Even looking through the impact of labour disruptions, we think Canada\u2019s economy has a bit less momentum than the central bank assumed in its April forecast. However, ongoing labour market strength will continue to cause the BoC some discomfort. Job growth remained robust in April (+41,000) with the labour market readily absorbing strong immigration-driven population growth. Canada\u2019s unemployment rate has been steady at a near record low of 5.0% for the past five months and wage growth is showing few signs of slowing. Job openings and forward-looking survey indicators of hiring and wage growth are easing, giving the BoC some cause for patience alongside other signs that the economy is softening. We think Governing Council will continue emphasizing its tightening bias near-term, but don\u2019t see it being acted upon. Our forecast doesn\u2019t envision rate cuts beginning until early 2024.<\/p>\n<h4 id=\"title4\" class=\"anchor\">Other central banks to join the BoC on the sidelines<\/h4>\n<p>The Fed hiked its policy rate by another 25 bps in May but opened the door to a pause in June. The current fed funds target range of 5.00-5.25% is now consistent with March\u2019s dot plot median, and updated language in the policy statement is reminiscent of when the Fed ended its tightening cycle in 2006. Chair Powell emphasized that a decision to pause in June wasn\u2019t made at May\u2019s meeting, and we\u2019re mindful that, as of March, 7 of 18 FOMC participants thought rates would need to move higher still. But with, in Powell\u2019s words, \u201csome signs that supply and demand in the labor market are coming back into better balance\u201d as well as growing evidence of policy traction and uncertainty about the impact of banking turmoil, we think the Fed\u2019s base case is to move to the sidelines in June. Market pricing is in line with that view, though policymakers continue to push back against the 2-3 rate cuts priced in by year end.<\/p>\n<div id=\"everviz-aM09DG5i_\" class=\"everviz-aM09DG5i_\"><\/div>\n<p>With UK inflation surprising to the upside, the labour market remaining strong, and GDP growth coming in firmer than the BoE expected, we now look for another 25 bp Bank Rate hike in May. The BoE is likely to keep its options open, maintaining a data dependent approach going forward. We\u2019ve revised our UK growth forecasts slightly higher given the economy\u2019s stronger momentum early this year\u2014PMI readings have swung from contractionary levels firmly into expansionary territory. But given growing global headwinds and with inflation still expected to slow significantly over the next year (albeit from a higher starting point) we continue to think the BoE is nearing the end of its tightening cycle. The market is pricing in 1-2 further hikes after an anticipated May increase but we think 4.50% will be the terminal Bank Rate this cycle.<\/p>\n<p>The RBA surprised the market with a 25 bp hike in May, quickly putting an end to its April pause. That was despite downward revisions to its GDP, inflation, and wage growth forecasts for 2023. While the central bank previously seemed willing to accept a gradual return of inflation to target, May\u2019s statement said policymakers want to see that happen within \u201ca reasonable timeframe.\u201d With updated forecasts still only showing inflation slowing to 3% by mid-2025, it maintained a tightening bias. We think a more restrictive stance may very well be needed to rein in inflation faster\u2014having lifted its cash rate by 375 bps thus far, the RBA\u2019s tightening cycle still lags a number of other advanced economy central banks. Its inconsistent communications add uncertainty to our forecast for the RBA to revert to a pause in June.<\/p>\n<h5 id=\"title6\" class=\"anchor\">Download full PDF report including forecast tables:<\/h5>\n<div class=\"rds-callout-white no-print\" style=\"border: 1px solid #c4c8cc\">\n<div class=\"section-inner\">\n<div class=\"flex align-items-center\"><\/div>\n<div class=\"grid-wpr eh-wpr mar-t-0\">\n<div class=\"grid-half\"><a class=\"pdf-link\" style=\"text-decoration: none\" href=\"https:\/\/www.rbc.com\/en\/economics\/wp-content\/uploads\/sites\/4\/2024\/11\/FMM_May2023.pdf\" target=\"_blank\" rel=\"noopener\">Financial Markets Monthly full PDF<\/a><\/div>\n<\/div>\n<\/div>\n<\/div>\n<p>\u00a0<\/p>\n<style class=\"advgb-styles-renderer\">.table-border { border: 1px solid #E0E0E0;} .w-35{width: 35% !important;} .col-4.flex {    justify-content: center;\n    align-content: center;}.bg-lightblue{background-color:#73b0e3;}<\/style>\n","protected":false},"excerpt":{"rendered":"<p>Banks are tightening credit standards amid financial sector turmoil. The lending slowdown will weight on U.S. and euro area GDP.<\/p>\n","protected":false},"author":268,"featured_media":1992,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"advgb_blocks_editor_width":"","advgb_blocks_columns_visual_guide":"","footnotes":""},"categories":[48],"tags":[],"class_list":["post-2108","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-markets-monthly"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.7 (Yoast SEO v26.8) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Crunch time - RBC Economics<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.rbc.com\/en\/economics\/financial-markets-monthly\/crunch-time\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Crunch time\" \/>\n<meta property=\"og:description\" content=\"Banks are tightening credit standards amid financial sector turmoil. 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