As good as done

It’s close, kids. The price of money is coming down June 5th.

As this pathetic blog surmised, Canada will drop its interest rates before the Yanks do. It won’t be much at first – a quarter point, taking the BoC rate to 4.5% and the bank prime to 6.95% – but it’s a start. After two years of a tightening cycle and ten increases bloating the CB rate by a whopping 1,900%, it’s over. Almost. Thirty-three more sleeps.

How do we know this?

Because Tiff says so. And he’s da man. “The message to Canadians is we’re getting closer,” he said on Parliament Hill today. “We do see renewed downward momentum in underlying inflation. We are seeing what we need to see and we just need to be confident that it will be sustained. Our key indicators of inflation have all moved in the right direction.”

This was in contrast to what the US Fed told us yesterday: “Inflation is still too high. Further progress in bringing it down is not assured and the path forward is uncertain.” American rates will also be declining this year. Maybe not until September, or even December.

By that moment, however, the Canadian prime rate could be at 6.2%. Mortgages could have a 4-handle. And houses could be even more expensive. Tiff admits his gang are expecting “a strong pick-up in housing over the course of this year with some increase in housing prices.”

Now, Fed boss Powell also said any further hike is American rates is ‘unlikely.” That was all it took to push the stock market into a 500-point ecstasy before profit-takers moved in to harvest the day. In trade following Macklem’s lollipop-&-pony monetary analysis, markets were again on the ascent. Nothing on this planet – not Trump, Gaza, Putin or the fact AI will kill us all – is more important than rates. They dictate consumer spending, which accounts for 70% of the American economy. They mold the bottom lines of corporations. They bring real estate boom or gloom. They impact GDP, currency values, trade and public finances.

Canada’s economy is materially weaker than that of the States. Our jobless rate is ticking higher, wage gains have stabilized, household finances have deteriorated, the new housing business has collapsed, home construction has faltered and we’re on the path to the federal debt costing $60 billion+ per year just to service. Inflation has gone from over 8% to under 3%. There’s no way the Bank of Canada will cling to its current policy rate for one day longer than required. And that day is in the first week of June. Current market odds: 66%.

The divergence between the US and Canuck economies, says RBC, “indicates the BoC should begin cutting interest rates earlier (and faster) than the Fed. We look for a first cut in June compared to the first expected move from the Fed later in December. We anticipate 100 basis points worth of interest rate cuts from the BoC by the end of this year versus just one 25 basis point cut from the Fed.”

But won’t a drop in rates 4x faster than in the US tank the loonie?

Yeah, says RBC, a little. “A widening gap in central bank policy rates that we expect is more negative for the Canadian dollar than would otherwise be the case. A weaker Canadian dollar will increase the cost of imports at a time when the central bank has been working hard to get inflation under control – with prices adjusting particularly quickly for products like gasoline, fresh fruits and vegetables.”

But because most of the economy (and consumer spending) is wrapped up with services, not goods – and given our lousy current productivity – it’s not expected inflation will reignite when rates and the currency decline together. Besides, we import a ton of stiff from places ther than the States (like China). And the Canadian dollar doesn’t look so wussy compared to those regions.

In short, Tiff seems ready to roll the dice. And roll hard, if Bay Street is right. Four cuts in the next six months. Wahoo. Chrystia will love it.

For those sitting on the fence waiting for lower mortgage rates before buying a house, understand that’s a really bad idea. The first cut – as modest as it may be – will signal change. Buyers will flood in. Sellers will smell profits. Sales and prices will respond. Meanwhile a tsunami of renewers who face refinancing in the next 18 months will taste redemption – taking downward pressure off the market as a whole.

So, if you really, really, no… really, need to buy a house, go shopping now, make an offer with a 60 or 90-day close and arrange your financing after Tiff pulls the trigger. Prices are not at the Jan/23 low point any more (we told you about that) but likely below what September will bring.

In short, Canada moves while the States holds. Mortgage interest costs fall. Real estate does not. The most macho central bank tightening in memory came, and is now going. The supreme irony will be this: as house prices rise, so will demand.

It is, after all, Canada. We’re nuts.

About the picture: “My partner and I are long time daily readers of your blog and we very much appreciate your advice and opinions,” writes Robin. “Thank you for all that you do. I’ve never written before but am so appalled by the recent hateful behaviour of (apparently) one of our fellow Powell River-ites that I felt compelled to send you a picture of our dog, Manx, who is best friend to my partner and is as friendly and as handsome a guy as you’d ever like to meet! We have a beautiful part of the country here in Powell River, BC, and I’m sorry to hear someone from here could be so awful.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.