Canadian households are celebrating cheaper credit after rates were further slashed. This morning the Bank of Canada (BoC) made its October rate announcement, slashing the overnight rate by 0.5 points in a single move. The “supersized” cut was widely expected by the market, but reinforces a troubling picture the central bank’s accompanying report confirmed. Canada’s economy is slowing so fast that the normally very controlled central bank is openly demonstrating panic, accelerating its easing cycle at a pace not seen outside of recession.
Bank of Canada Makes “Supersized” Double Cut To Interest Rates
The BoC made the decision to adopt a supersized rate cut, double the typical pace. This morning the BoC overnight rate fell to 3.75% after the central bank slashed 50 basis points (bps) in a single month. Despite being widely expected and priced in by the market, this was an unusually large one—double the size of a standard cut. The central bank confirmed what many suspected—the cuts are accelerating due to a weak economy.
The risk of excessive inflation is now turning into the risk of deflation, according to the BoC. CPI fell to 1.6% in the latest report, below the 2.0% target rate they maintain. They attribute this to weak demand, creating excess supply. It’s like the country is going from a shortage to oversupply almost as fast as interest rates fell and climbed.
Bank of Canada Fears Economy Is Underperforming The World, Population Slowdown
Behind the fear of central bankers is Canada’s underperformance against global peers. The BoC is forecasting real GDP growth will be just 1.2% in 2024, nearly a third of the 3.0% global average currently forecast. Adding fuel to that fire is a slowing population, with annual growth forecast to drop 0.25 points to 2.75% between the first and second half of the year.
For context, Canada’s population growing at 2.75% per year is still massive growth. It’s just not what many had anticipated, and the decline comes before many of the policies designed to throttle growth even further in the coming months.
Supersized rate cuts are good news for those managing debt, but also a sign of economic panic. The central bank’s research shows it takes between 18 and 24 months for the market to reflect rate decisions fully. The current easing cycle has seen the BoC make the equivalent of 5 rate cuts in less than 6 months. They’re even reversing some of the tightening done less than 24 months ago, indicating that many of those hikes were unnecessarily punitive.
The BoC is sending a clear message—they’re in panic mode over the economy. There’s no time to raise one hike at a time; the BoC doubled the pace of rate cuts, a move typically not seen outside of a recession. Cheap credit is great, but the context in which it’s being delivered is more worrying than people realize.
US dollar up 0.20% on the loonie on today’s news. The US economy has never been stronger and Canada’s central bank is worried people can’t make money, so they need access to more leverage to keep the economy going?
Oh lordy, this is going to be grand.
I have a question. If everything is priced in USD and CAD is weaker, why isn’t it being reflected in inflation? Clearly I can see the cost of materials rise with weaker CAD when I’m ordering materials.
It probably is being reflected in inflation, but deflationary pressure from our terrible economy is likely suppressing it. Also not everything is priced in USD, it’s like 9% of global trade/25% of global GDP. If I wanted to import goods from China for example I could convert Canadian dollars directly to Chinese yen, no USD involved.
Lower rates in Canada is inherently inflationary though, as CAD will become weaker against all global currencies that don’t cut rates, not just USD. It’s all a matter of whether or not other factors like the economy or domestic activity push inflation down against imported inflationary pressure.
Forex hedges and pre-ordered goods. If the CAD weakness continues, you will eventually see it in the CPI numbers.
Cheap credit means accelerated debasement. This is how they dump the debt on holders, which ironically are taxpayers since no one is buying the Canadian government debt.
Can’t wait for the next government. Not because I think Pierre will bring in an era of prosperity, but it’s the only way we’ll see what the Department of Finance has been hiding with its circular purchasing its own debt.
You know an economy is in the sh!tter when the central bank has to explicitly say the cheap credit isn’t QE, it’s a fiscal decision.
Can Freeland drink a glass of water while Tiff announces rate cuts?
Still very confused why Tiff said low inflation was transitory at the last meeting, then doubled the rate cuts at this meeting. He over hiked because he was worried that high inflation was transitory, but he’s over easing because low inflation is transitory?
Yeah I don’t buy that low inflation is necessarily transitory either. Rents are falling, immigration rates are collapsing, and productivity and GDP numbers are abysmal. The BoC’s only hope is to lower rates enough that Canadians have enough room to lever up even more than before and bail out the economy yet again with cheap credit. It worked in 2008, but the problem now is Canadians are already too broke, unemployment is rising, and I don’t think it’s a trick they’ll be able to pull twice. But we’ll see I guess.
I hope Stephen is going to write about the report acknowledging the accelerated rise and fall of CPI is due to the basket shift. We knew he was right in the industry, but it’s rare to see them actually acknowledge it.
My guess is Tiff was too busy with his summer home to edit the latest report.
It is actually quite funny. The money launderers, dirty politicians, realtors, builders car dealers etc. are now losing $$ as housing demand and prices roll back decades across Canada. Buy new USA houses for less than 400K. See youtube, zillow, redfin and landsearch.
As a homeowner this is AMAZING news and I thank Justin Trudeau for supporting us! As long as he is in Ottawa there is hope!
An effort to prop up the housing market. Property prices falling fast is the banks nightmare. Lower construction activity, higher unemployment, less money around , lower house prices. Industry in trouble as spending collapses as customers feel poorer. Yet more unemployment. A potential spiral down is what the bank of Canada is looking at. This drop in interest rates is an attempt to avoid a crash. Probably will not work too well. Previous interest rate drops have had little impact. Incomes are too low relative to property prices. The housing market needs to collapse.
Sellers are holding their prices but are being undercut by forced sales be it insolvent home owners or bank repossessions and this group is increasing rapidly.
Interest rates on mortgages do not really matter if property prices are falling as most buyers cannot afford the potential loss in value which is much more significant than the interest rate you are being charged.
I make no claims to financial or economics expertise, but isn’t deflation something we actually need / could use right now? As far as I’m aware, inflation has been running in the ‘+’ territory, above ‘target’, for many years now, such that goods prices in real dollar terms are higher than before, and certainly higher relative to median incomes. Isn’t deflation needed to bring goods prices back down to the realm of median affordability?
Why would the BoC want to drop interest rates now, when they have the experience that past drops have induced inflation? Isn’t this going to happen again? Now that inflation has stabilized around the target rate, doesn’t that mean we should just leave the interest rates where they are?
Further, when it comes to housing, I seem to recall that in the early 2000’s, interest rates were higher than they are today (seems to be around 4.4% – 4.7% right now; my mortgage rate in 2001, 5-year fixed, was 6.48%), and I don’t recall anyone screaming about how interest rates made new projects unfeasible back then.
How did we go from ‘record savings’ during the pandemic (including claims of a New Roaring 20’s to be anticipated by the end of the pandemic – I remember the headlines), to a ‘labour shortage’ near the end of pandemic (but that wasn’t a shortage of full-time, living wage positions if I remember correctly), to ‘roaring inflation’ at / after the end of pandemic, to company layoffs in 2023 / early 2024, to now a ‘risk of deflation’ / potential recessionary response? All the while housing prices climbed (and remain) several multiples of median incomes? What on earth
changed in our daily and weekly life functioning, pan-nationally, that affected our productive economy so much to result in such wild swings?
You’re actually on the money here. The BIS has a paper on how intentional deflation will boost productivity. It balances the absurdity we just saw. .
The problem is going to be trying to convince academics to admit they were wrong about China intentionally pursuing deflation.
Can we just copy-and-paste this example as the definition to use in the dictionary of proactive vs reactive? I don’t know what Tiff has to do to lose his job, but if no one at the BOC knows any better and can’t sway him, then they all need to go.
Oh, here’s a novel approach. Sometimes desperate times call for desperate measures and that means you aren’t obligated to wait 6 weeks to make a call if there is need to.
The policymakers are supposed to make the policies that Serv the interest of their country. If real estate is causing a drag to overall economic productivity, then policymakers need to be candid in making their decisions.