The pivotal moment

For the sixth and last time, Tiff hit the snooze button. As economists expected, no change. Rates on pause today. The policy stays at 5%.

The big question remains: when do the cuts start? Markets believe the answer’s still June. The CB is being careful not to build up expectations and, in fact, still warns rates could rise. But it always says that. We’re goin’ down.

The reasons are simple. Inflation has been sub-3% for a few months. The economy is languishing. The last jobs report sucked. The big banks have set aside a few billion for potential bum loans. Business confidence is frayed. Hundreds of thousands of small enterprises couldn’t even repay their Covid loans in order to get $20,000 in free money. Mortgage default rates – while still weensy – have been on the rise.

In short, ten rate increases followed by lots of pauses have done the trick. The CPI wilted from 8% to 2.8%. If Canada is to avoid a recession, rates must decline. After all, it takes a long time – like a year – for monetary policy to work. So lower rates in the second half of 2024 will not really rescue the GDP until sometime next summer.

Tiff knows all this. The language in today’s statement was definitely on the dovish side. It’s coming…

Based on the outlook, Governing Council decided to hold the policy rate at 5% and to continue to normalize the Bank’s balance sheet. While inflation is still too high and risks remain, CPI and core inflation have eased further in recent months. The Council will be looking for evidence that this downward momentum is sustained. Governing Council is particularly watching the evolution of core inflation, and continues to focus on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour. The Bank remains resolute in its commitment to restoring price stability for Canadians.

Two points to consider: Canadian rates will probably decline before those in the US. After all, the Yanks have a swelling economy, full employment, higher inflation, Nvidia, Trump, Taylor Swift and Stormy Daniels. How much stimulus can one nation take?

Second, a cut here in early June and no US drop until later in the year will likely impact the Canadian dollar. But American rates are already higher than ours, plus we have oil. So a loonie fade for a few months is hardly any crisis.

But what about housing?

TD economist Francis Fong just raised this alarm: “A lot of borrowers are still sitting on the sidelines… waiting for prices to jump in, which incidentally also puts a bit of a floor in housing prices because the instant there’s a drop in interest rates, a drop in prices that makes things even remotely affordable, people are jumping back in.”

Is that true? Could a minor, inconsequential, quarter-point slice in the Bank of Canada rate really ignite a housing market that’s been thin on sales for an entire year? After all, prices haven’t moved a whole lot (except in hormonal Calgary) despite mortgages plumping from 1.5% to over 6% – and RBC just told us affordability is the worst on record. Insolvency experts are now counselling the kiddos to get used to renting, since the financial sacrifice required to owwn property is life-threatening.

Well, look at what house-humping Royal LePage claims in its latest survey. More than half (56%) of prospective buyers abandoned their quest when the Bank of Canada started its ratefest, but half of those say they’ll resume when the cost of money starts to decline. One in ten state a quarter-point drop will be enough to motivate them into making an offer. Almost a fifth are waiting for a drop of half or a full point. Another quarter want to see at least a 1% decline in borrowing costs.

Says the ever-hustling CEO Phil Soper: “I expect a similar wave of buyer demand at the first indication that highly-anticipated cuts by the central bank are on the horizon. Buyer behaviour is strongly linked to their confidence that the home they want to buy today will not be less expensive tomorrow. We expect the spring will mark that pivotal moment.”

Sadly, he’s right. Our society is still addicted.

So, the focus now turns to Tuesday.

In next week’s federal budget, will the Trudeau Liberals do what lenders expect and usher in the return of CMHC-insured 30-year amortizations? Will they increase the $1 million property price cap for taxpayer-backed home loans? Will there be new billions in housing incentive programs? And will personal taxes rise on those 60% of citizens left who actually pay more than they receive?

In short, will Chrystia Freeland and her boss jump the gun, igniting a new property rush even before the central bank fires its starting pistol? Would that, in turn, cause the CB to delay its rate-chopping, bring recession, and render fools of those who jump in now?

So many questions. But every day brings more clarity. Leaders do not want lower prices.

About the picture: “I took this shot in Paris,” writes Paul, “on the swanky Rue de Faubourg Saint Honoré. He was sitting right in middle of the sidewalk.”

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