The big reveal

Just two more sleeps ’til Tiff day.

It’ll be a corker, with an interest rate decision, statement, media conference and background document on Wednesday from the Bank of Canada – those fun guys who hiked rates ten times, took mortgages from 1.5% to 6.15% and made your house worth less in 2023.

What’s coming?

Nothing. A pause. No change in the CB rate, the prime at your bank, home loans, lines of credit, business loans or HELOCs. But Mr. Market is clearly indicating this will probably be the last time boss Tiff Macklem hits the snooze button.

Here are the implied interest rate movements and probabilities based on BAX prices (Canadian Bankers Acceptance Futures).

June: the odds are 86% that the CB cuts its rate by a quarter point.
September: there’s a 90% chance the rate will be lower by a half point.
December: by Christmas the betting is 90% on 75 bps below the current level.
March, 2025: a full 1% reduction (68% odds).

In other words, markets are still pricing in three rate drops for 2024. The reasons are many. Inflation is back with a 2-handle lately. GDP growth has been tepid. The latest jobs report was a disaster. Unemployment is over 6%. The housing market is flaccid. Business investment is down, household financial stress is up and debt service charges are whacking both family and government. No rate relief will probably bring recession – not the goal of the Bank of Canada and certainly not of the feds, facing an election next year.

But wait. Some people argue the CB should be in no hurry to reduce borrowing costs. Like our iconoclastic, acerbic econ bud, Derek Holt.

Not so fast, Tiffster, he says. The BoC won’t be deceived by just a couple of thin CPI reports and one wanker of an employment print – it wants to see many months of data showing the inflation beast has been slain. Meanwhile wages are rising too fast (5.1% lately) and the population continues to expand dramatically while businesses and consumers have high inflation expectations. All of those are red flags for monetary policy. “The point is that the BoC would be silly to overreact to so little data,” he says, “especially in isolation of solid arguments for why bigger picture developments have added to inflation risk.

Moreover, there are new risks.

If the BoC chops too early, he adds, the bond market will overreact and investors get all giddy. A bigger threat is the housing market. Any rate cut could unleash a coiled-spring of demand. Says Holt:

The Easter Bunny robbed realtors of some sales in March that should be made up in April but the uncertainty lies around how powerful the season will turn out to be. Buying intentions remains very strong (chart 7). Housing shortages pre-existed the surge of immigration that has compounded them while strong trend job gains and firm wage pressures are supportive of housing demand. First time buyers are sitting on the sidelines having waited out a soft patch on prices. Targets for permanents residents remain high and so it will take many years yet to address housing shortfalls and pressures on affordability in a best case scenario.

Finally, the Bank of Canada has to worry about what’s going on down Wellington Street, in the PMO. As we detailed here last time, the feds have the ability through fiscal policy to screw up what Macklem’s trying to do through monetary policy. The Liberal government in its budget next week could (a) stimulate housing demand for 30-year mortgages, a higher CMHC borrowing limit or other foolishness that may unleash buyer hormones or (b) usher in material tax increases for higher-income Canadians which Holt warns “could dampen economic growth, given evidence that they have driven so much of the gain in consumer spending over time.”

Well, that’s what we know now. No rate change this Wednesday. Big unknowns coming from Chrystia the following Tuesday. And ninety per cent odds that borrowing costs will start dipping in June.

Our pal Derek is a smart egg. But he’s not a politician.

If you’ve been house-shopping, I wouldn’t wait.

About the picture: “This is Karma after reading that your blog had been taken over by primadona cats,” write Nicole and Michael, in Cornwall. “He could not believe his eyes when he saw for himself, hence the look and the glass of wine lol. Karma is hoping that his small contribution of his rather very shy furfriend pic can help you edge them out to oblivion (or almost ).

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