Bank of Canada wary of signs of a turning point in economy, as it hikes key interest rate again
But Tiff Macklem sees rates staying high even as prices stabilize and economy retreats
Wednesday's Monetary Policy Report from the Bank of Canada offered a similar lesson, as the central bank once again warned that the poor and over-borrowed were likely to suffer more from both high inflation and the high borrowing rates needed to bring down stubborn inflation.
While he admitted that the latest quarter-point hike in its key rate to five per cent would hurt many people, Bank of Canada governor Tiff Macklem warned that he remained wary of overshoot — with the possibility that the lagging effects of a long series of interest rate hikes could kick in suddenly and put the economy into reverse.
Unnecessary pain?
"We're trying to balance the risks of under- and over-tightening," Macklem said in answer to a reporter's question at Wednesday's news conference in Ottawa. "If we do more than we need now, it's going to be unnecessarily painful."
Asked repeatedly by reporters why a string of 10 interest rate hikes had not had a stronger impact on inflation, including food and house prices, Macklem and senior deputy governor Carolyn Rogers cited a number of effects, including a housing shortage, a strong labour market and the post-pandemic surge in immigration that recently sent Canada's population to the 40-million mark.
But the other thing that may be "buffering" the effects of higher rates are forces similar to the K-shaped recovery that we saw after the COVID-19 pandemic meltdown. Just as we've seen in recent climate disasters, not everyone is affected the same.
Following
the COVID-19 pandemic, some economists predicted there would be a
K-shaped recovery, as richer people bounced back and poorer people did
not. Now there are signs of a split in the Canadian economy between
those with savings and those without. (Jeff Curry/Reuters)
"We deal in a lot of aggregate numbers and averages, but we know that inflation and interest rates affect people very differently," Rogers said. "In particular, we know ... that the most vulnerable Canadians are the ones that are hurt most both by inflation and by higher interest rates."
While news stories quite fairly focus on the plight of the worst off, a majority of Canadians remain in financial good shape, she said. And those better-off Canadians are able to keep spending even as prices rise.
"There are two things that are helping buffer many households from both inflation and interest rates, and that is the savings they accumulated over the course of the pandemic. You can see three-quarters of households have accumulated quite a bit more savings than they had prior to the pandemic," Rogers said, citing the Monetary Policy Report (MPR), which contains many interesting graphs and charts.
"The other thing we think is supporting confidence and buffering Canadians from some of the impacts is the strong labour market," she said, adding that people are not afraid of losing their jobs.
Central banks have been wrong
While Macklem and Rogers emphasized the view that we are heading to a slow and smooth soft landing without heading to recession, an MPR outlook is never complete without a mention of the downside risks.
"It's ridiculous to think that a quarter-point rate hike [on Wednesday] would make the difference between starting a recession and avoiding recession," longtime Edmonton financial analyst and author Hilliard MacBeth wrote in a social media post this week.
But of course there are many examples of what we might call the last straw effect, when a final increase in rates or the final rise in global temperatures can lead to a cascade of consequences. The impossible thing to know in advance is when the moment is reached. Certainly both the Bank of Canada and the U.S. Federal Reserve have gotten sudden changes wrong in the past.
Many economists have suggested that central banks around the world have gone too far, too fast in hiking rates and that the well-known lagging effect of previous sharp rate hikes could come all at once.
Canadian author Malcolm Gladwell wrote a whole book about the concept in The Tipping Point, "that magic moment when an idea, trend or social behaviour crosses a threshold, tips, and spreads like wildfire."
In the climate context, that wording might be disquieting in a year when the hectares burned in Canadian wildfires hit a new "magic moment".
In the Canadian economy, there are a number of negative indicators that could come together to cross a threshold.
Hints of a June slowdown in home sales could be confirmed in Friday's latest real estate data. A sharp fall in U.S. inflation on Wednesday, new rules to cut risk on mortgage extensions and this week's announced decline in sales at Aritzia are potential signs that the economy may be reaching a turning point.
Growing signs of a slowdown
"Increased missed payments on products like credit cards and auto loans are a concern," Rebecca Oakes, vice-president of advanced analytics at Equifax Canada, said in a release of new data last month.
The average interest rate that mortgage holders are paying is still well below what you'd pay if you had to renew now. As each person's renewal comes due, they will have to take money from their consumer spending to debt repayment.
"The impact of the rate hikes were felt in markets (especially bonds) in real time, but the real economy is only just starting to feel the real effects of the tightening of the credit channel," Cullen Roche, a well-known U.S. money manager, said in a social media post.
This week, inflation in China — a country blamed for contributing to global price hikes due to its pandemic industrial shutdowns — fell to zero, with producer prices actually shrinking.
Former Bank of Canada governor Stephen Poloz used to say he had to steer by looking in the rearview mirror.
On Wednesday the current governor said while there may still be more rate hikes ahead and little chance of interest rate cuts, he'll watch the economy meeting by meeting in order to be ready for the unexpected.
ABOUT THE AUTHOR
1. Since there existence their claim was to back stop banks. This is not the same as intervening in the market. The current problems are a continuation of 2008 crisis which was the result of the last 50 years of money devaluation policy. The money system has become more unstable because of their centralized policies.
2. They are an unelected invalid issuer of money. They agenda they are pushing through the use of economic policy on people, contradicts the goals of the charter and freedoms. The impoverishment through money devaluation, and funding of credit to the government, results in ever increasing power of the state over the people.
Zach weyrauch.
Reply to fred green
You're close you just gotta stop believing the corporate myth of 'big government'.
The state isnt wielding the most power in our society right now, corporations are. That's why our government is in a standoff with two corporations right now over news media.
When will you learn?
Reply to David Amos
I already have and it's not the drivel Fred posted.
Reply to Larry McCarthy
Drivel?
Reply to Zach weyrauch.
Since you have "learned", enlighten us!
Reply to fred green
At least believe something that's factual Fred.
I did in 2002 when I sued 3 US Treasury Agents Remember?
Reply to Larry McCarthy
Reply to Larry McCarthy
Reply to Larry McCarthy
Reply to Larry McCarthy
Reply to Larry McCarthy
Reply to fred green
But hey keep spending
Iain Basedord
Reply to Luc Newsome
Reply to Luc Newsome
C anadians are just following Justin's advice, I guess: The budget will balance itself.
Larry McCarthy.
Reply to Scott Bullerwell
Canadians are sheep?
David Railton.
Reply to Larry McCarthy
all but thee of course
Reply to David Railton
I had no idea I'm the only one who takes responsibility for my financial decisions!
Reply to Larry McCarthy
no you are the only one that is not a sheep - a lofty and inspiring position were either to be true
Reply to David Railton
Nothing lofty about taking responsibility for personal debt.
Reply to Larry McCarthy
as you said Canadians are sheep thereby indicating that you and you alone are not - lofty indeed
Reply to David Railton
I asked Scott if they are David. Don't twist my words.
Reply to Larry McCarthy
Canadians are sheep? "
Reply to David Railton
Reply to Larry McCarthy
Reply to David Railton
Reply to Larry McCarthy
Reply to David Railton
It is, and we both know it. You're much too obvious. Ciao.
David Railton.
Reply to Larry McCarthy
yes I am
Larry McCarthy
Reply to David Railton
You're parading your desperation! Too funny!
Reply to Larry McCarthy
to a crowd of one
-people put in fake T4 slips and income levels on mortgage applications and banks didn’t verify so stress test was avoided and people borrowed way more than they can afford
-Investors bought eg 50 properties and put down it was their First RE purchase on each mortgage application so the investor only put 5% down payment instead of the 25% down payment they needed for investment properties. Banks and bank employees wanted the business and the mortgages are CMHC insured
Reply to James Minion
Any evidence for that, Minion?
Reply to Larry McCarthy
There’s plenty of stories out there from insiders but banks and government keeping it hidden from general media
It’s like the US in 07, people didn’t find out what was happening to years later as the truth leaked out and economy got way worse in 08-11
Reply to Larry McCarthy
Just been chatting with bank financial advisors and mortgage brokerages that deal with dozens of clients a day. Ask them the right questions and you’ll find out a lot.
Though you need to know how to step back and put all the pieces together and that’s the part the average Joe can’t do
Reply to James Minion
Failure to carry out due diligence voids the mortgage insurance which is why most banks will terminate employees who are caught fudging the mortgage application.
Reply to Henri Bianchi.
most banks giving employees with high mortgage sales higher commission and bonuses. So some employees let anyone apply and get accepted on Canadian mortgage applications
Reply to James Minion
Reply to James Minion
Reply to Larry McCarthy
I’ve analyzed the full picture but if I try to post detail with links, graphs, charts, etc the comments get DC so not with the time here
Reply to Larry McCarthy
I’ve seen evidence and even the W5 video from about 6 months ago is one of thousands and thousands of cases
Reply to James Minion
Reply to James Minion
Reply to Larry McCarthy
Therefore if in the last 5 years Canada copied the US mistakes from 02-07 then you know what the coming months bring!
Just prepare for it!
Reply to James Minion
Reply to Larry McCarthy
Harper did a go job stopping it before it got out of hand. If a year more had gone by, Canada would have been just as bad as the US in 08 at the time
Now Canada has much looser bank regulations than the US in 02-07 so now it’s Canadians turn to experience the US’s version of 08-11 in upcoming next few years
Reply to James Minion
Reply to Larry McCarthy
He bailed out the banks is about $150 Billion to save them from crashing
Justin will do the same in next few years but where does he get the $ from after spending so much on covid and giving it to foreign countries and foreign buyers?
Reply to James Minion
Reply to Larry McCarthy
It was cash given to prevent a crises at the time after seeing what just happened to US banks in 08. Without that $ the Canadian banks might not have survived those years
Though this time over $1 T is probably needed to save Canadian banks in next two years from a much worse situation
Reply to James Minion
Bank of Canada raises its key interest rate to 5%
10th rate hike by central bank since March 2022
The move was expected by economists after Statistics Canada released its June labour force survey last week showing that Canada added 60,000 jobs last month — further contributing to an overheated economy.
Some of the country's biggest lenders, including the Royal Bank of Canada, CIBC, Bank of Montreal and TD Bank, have already announced that they will match their increase effective Thursday to align with that of the central bank's.
Following the announcement, experts diverged on whether Canadians could expect another increase after the summer. Trading in investments known as swaps — which bet on future central bank moves — imply there is a better than 75 per cent chance of another small hike at the bank's next meeting on Sept. 6.
The effects of interest rate hikes can sometimes take a year or a year-and-a-half to play out in the economy.
"There's an element of patience, and I think that's why as well you see [the bank] being as noncommittal as they were today, with respect to whether they will be performing more hikes," Desjardins chief economist Jimmy Jean told CBC News in an interview.
"They're trying their best to communicate something to Canadians that can provide them with some sense of clarity. But the problem is that they don't have that clarity themselves."
Could be mid-2025 before bank hits inflation target
Wednesday's rate hike marks the 10th by the central bank since March 2022. It hit pause on those hikes in January for a few months to determine whether the economy had sufficiently cooled, then resumed its campaign in June.
"Global inflation is easing, with lower energy prices and a decline in goods price inflation. However, robust demand and tight labour markets are causing persistent inflationary pressures in services," the bank wrote in a release.
During a mid-morning news conference on Wednesday, Bank of Canada governor Tiff Macklem said the bank expects inflation to ease but that it could take until the middle of 2025 to hit its two per cent target.
That's six months later than was forecast in April.
"We've been clear about the indicators we are watching, and it's clearly too early to be talking about interest rate cuts," Macklem said, adding it's also too soon to tell how much impact the rate increases are having.
"We are certainly trying to balance the risks of over- and under-tightening, and we'll be taking it one meeting at a time."
The bank's Monetary Policy Report noted that the bank would raise its rates because of persistent "excess demand."
Canada's population surpassed 40 million people last month and is growing at its highest annual rate since 1957. Population growth is a key factor contributing to job growth, consumer spending on goods and services, and housing demand.
The inflation rate slowed to 3.4 per cent in the year up to May, down from 8.1 per cent last summer, as the central bank's efforts to rein in the number paid off. But rising food prices were still outpacing inflation — an ongoing trend since late 2021.
'I've thought about selling'
With Wednesday's rate hike, a typical mortgage holder can expect to pay more on their variable rate loan, starting on Thursday.
A homeowner with a $500,000, 25-year variable rate loan at a rate of 5.8 per cent on Tuesday would have been paying $2,512 a month. After Wednesday's hike, their rate is likely to jump to 6.05 per cent, which will bump their monthly payment up to $2,571 a month. That's an increase of more than $700 a year.
Exact numbers will depend on the specifics of the loan, but on average, mortgage analytics site RateHub.ca says mortgage holders can expect to pay $100 more per month on their mortgage after Wednesday's hike.
Leena Chandi, a single mother of three who purchased her Surrey, B.C., townhouse seven years ago, said she would lay down and cry if another hike were announced, as it was on Wednesday.
Leena
Chandi, a single mother of three, purchased her Surrey, B.C., townhouse
seven years ago. She's watched her variable mortgage rate double since
the Bank of Canada began its aggressive campaign to cool inflation. (Martin Diotte/CBC)
Having started on a fixed mortgage, she switched to a new bank and took on a variable rate about a year-and-a-half ago — before the Bank of Canada began its quest to tame an overheated economy with a series of interest rate hikes.
"All of a sudden, boom. The first increase happened and I was like, 'OK, well, whatever, you know, that's fine, I can handle it," Chandi told CBC News.
"And then the second increase happened and then the third increase happened, and then the fourth and then the fifth, and now my mortgage payment is doubled."
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Chandi said her biweekly payments increased from $800 to $1,300 during that period.
"I've thought about selling. I really have because ... my townhouse is now probably worth three times, almost 2½ times what I paid for it. But where am I gonna go?"
Mortgage rates driving inflation
Clément Bonnal, a Quebec City resident who bought his house in 2021, said his mortgage payments have increased by almost $700 per month.
He said that a rate hike by the Bank of Canada is "nonsense" to him, as rising mortgage costs are now driving inflation, having climbed by 30 per cent in Statistics Canada data from June.
Bonnal questioned why the bank would continue to raise interest rates when inflation is close to its target range — and given that the impact of rate hikes can sometimes take more than a year to appear in the economy.
"If they continue to increase the rates, it's like a fireman that puts the fire in the forest," Bonnal told CBC News.
Carolyn Rogers, senior deputy governor of the Bank of Canada, said during the Wednesday news conference that while housing is sensitive to interest rates, housing demand is still outweighing supply and driving up prices.
"We target inflation," she said. "We don't target house prices, and we don't target any one sector or one item within the [consumer price index] basket."
For Chandi, the mother of three in B.C., it's cold comfort as she considers the price of groceries and clothes, on top of paying her university-aged daughter's rent and contributing to her children's RESPs.
"Do they actually realize how much of an effect this is having on the average person?" she said.
"It just seems like we have no say. We're just at the mercy of the Bank of Canada right now."
ABOUT THE AUTHOR
With files from Pete Evans and Phillippe de Montigny
"Trudeau acknowledged the bank's decision isn't what many Canadians want to hear. But he framed the issue as a global one that's not unique to Canada.
"I've had conversations with leaders here in Europe and around the world and the cost of living is a real challenge," he said. "People around the world are facing significant challenges."
Trudeau said his government is "stepping up with targeted support for people who most need it at this moment." He pointed to the government's GST rebate — which has been branded politically as a "grocery rebate" — as one of those measures.
Poilievre said a government led by him would "axe the carbon tax" and rein in government spending as part of a push to get inflation under control."
David Kingston
Maybe people should just work more.
Reply to David Kingston.
We ....Must.....Punish....everyone
Reply to Sara Shepard
Loblaws balance sheet shows $8.5 Billion in debt
Variable rate mortgages and long term LOCs borrowed money, that's why they pay for the interest
Reply to Sara Shepard
Many countries in Europe and the UK have wind fall taxes. They however are not banana republics
Reply to Sara Shepard
Tax is the only solution some governments know
Reply to Andy Shilkenberg
Nothing a good “restructuring” and a whole whack of tax deductible write downs won’t solve
Reply to Robert Tyre
Interest is tax deductible as it is an expense, but maybe provide an example of how what you are proposing helps them avoid paying principle and interest?
Reply to Luc Newsome
Oh so true
Reply to Andy Shilkenberg
And how much profit? Net worth?
Reply to Troy Bodi
The comment was about the brunt of interest rates, don't know what profit and net worth have to do with that.
Reply to Andy Shilkenberg
Loblaws can afford the debt. They might even be doing it strategically. 5% interest is fine if they can get the equivalent of 6 out of the customer. Vs average Joe that just wants to buy a house.
Reply to Troy Bodi
Because someone can afford something, then they owe? I paid 5% + when I bought my house; who owes me?\
Yes, but corporations artificially increasing prices to increase profit - e.g the 16-year bread price fixing scandal and 'greedflation' post supply-chain pandemic issues - are gouging the same people who took v.r. mortgages and, granted, they didn't have the foresight to know borrowing at historically low interest rates/free money for so long had to end sometime but they also couldn't have predicted 10 rate increases in 14 months.
Jessie MacDonald
But but but........insert today's talking point. It's nothing to do with the consequences of 8 years of policy decisions.
They're here all day long 365 days.
Real tax payers they are.
Reply to Andy Wall
Whereas, in fact none is necessary.
So it is not clear to whom the comment is being addressed.
Luc Newsome
“Gap between high and low income Canadian households widening at record pace: StatCan”
David Green
What’s happening with housing and interest rates plus the high cost of everything is the result of the last 8years. There is no easy fix to it either just a lot of financial pain ahead, but could we please stop making it worse with more spending announcements every week.
Reply to David Green
Doubling the money supply has dire effects. It's not like this hasn't been done before.
Some can not be reached or are incapable of learning from history.
Reply to David Green
The problem is the economy is too good to slow down, so the BoC put the brakes on. They do this when the economy overheats, and they should have reacted earlier.
Reply by Arron Wheatly
I concur
The economy is not too good. Just the opposite. If can't see it that's on you. The fact is there is too much cash chasing too few goods because of monetary policy.
Reply by Arron Wheatly
Craig Macneil
Reply by Arron Wheatly
Best economy in Canada's history.To much cash because the economy is so good and wages rose.
Reply by Bill Harding
Our economy is not healthy the is little investment other than more government debt.
Horst Jakob
A lot of money back then but no comparison to today.
Craig Macneil
Reply to Horst Jakob
Wages was one quarter what they are now.
Reply to Horst Jakob
especially considering wages have not kept up to the cooked inflation numbers.
Reply to Horst Jakob
I had a home mortgage and business debts as well back in the early eighties when interest rates went through the roof
Reply to Horst Jakob
I had a 6%+ rate in the last 20 years and I borrowed a lot more than 60 grand. More than double.
Reply to Horst Jakob
It's all relative.
Reply to Horst Jakob
inflation
Reply to Craig Macneil
Wages would depend on job, city and exact time and place - I could counter - yeah, one wage-earner.
Reply to Horst Jakob
ah yes, bo omers post this endlessly, forgetting that the wage to cost of living and housing indexes were waaaaaayyyy better back then
Purchasing power was much higher back then.
Reply to John Oliver
Out of school as a millwright my first job paid 9 a hour.My son's first job as a Millwright paid 27 a hour.
Reply to Craig Macneil
Apprentice.
I'm 54
What data?
Meanwhile, the costs of most inputs purchased by food retailers have slowed rapidly — and in some cases are falling outright. Crop prices fell 22 per cent over the last year. Energy costs fell by one-third. Meat and dairy inputs rose just 4.5 per cent (half the pace of final groceries), and fruit and vegetable inputs just 1.2 per cent.
The cost of producing and selling groceries is moderating. Yet grocery prices are still surging. What gives? - The Star July 9/23
Troy Bodi
Reply to Brent Hiker
We gives. And Galen takes.
Reply to Craig Macneil
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