Four Canadian Banks Urge The BoC To Raise Rates, Another Is Warning Home Buyers

The kings of Bay Street aren’t happy with Canada’s central bank, and they’re no longer holding back criticism. Four of the “Big Six” banks have recently urged the Bank of Canada (BoC) to raise the overnight rate. Another bank hasn’t urged action, yet. However, they’ve warned consumers of the risk of buying a home at this particular time. The BoC should be supporting the banking system as one of its primary goals. It appears the banking system now sees the BoC as reckless, and has begun to distance themselves.

RBC: Inflation Isn’t Transitory, Multiple Rate Hikes Needed Soon

Canada’s largest bank is the latest to urge the BoC to raise interest rates, and they did so with its top brass. “This is permanent, sustained inflation that has to be dealt with through monetary policy, and therefore we need rapid action this spring as a series of rate increases to address it,” said RBC CEO David McKay to Bloomberg News this week (Jan 11).

The executive warned wage increases aren’t transitory. If high inflation drives wages higher, the inflation is now priced in. It can’t be transitory. We don’t roll back wages, and they can’t roll back prices once wages adjust.

Higher wages might sound great, but if they’re higher due to the cost of living, the benefits are negative. Not only are you not getting more purchasing power, but inflation is underreported. The result can be wages rising substantially, but not enough to cover the cost of living. Reduced consumption, lower future purchasing power, and devalued existing capital. 

BMO: It’s Not A Supply Issue, The BoC Created A Demand Issue

Economists at Canada’s oldest bank were amongst the first to sound the alarm on the BoC’s easy credit. BMO chief economist Douglas Porter publicly questioned the central bank’s moves starting on Oct 25, 2021. “… [the BoC’s] current ultra-stimulative policies look far out of step with red-hot housing, record equity markets, decades-high inflation, and employment back at pre-pandemic levels,” he wrote in a research note to the bank’s capital markets clients.

Adding, “…There simply is no justification for such extreme stimulus at this point.”

BMO also pinned the reacceleration of home price growth on the BoC recently. They argue it’s no longer a lack of supply but excess demand created by the overabundance of easy credit. “It’s telling that the biggest share of transactions, according to Teranet data, is now investors,” the bank said in another note, suggesting interest rates should have been climbing a year ago.

National Bank: The Bank of Canada Is Jeopardizing The Recovery

National Bank of Canada (NBC) has arguably been the most critical of the BoC’s policy recently. From the BoC discrediting its own inflation research to ignoring employment benchmarks it set for itself, they’ve questioned the bank for the past year.

“… maintaining such a loose policy standing much longer risks compromising Canada’s longer-term economic and financial market prospects,” warned NBC in a research note sent to clients in early December.

CIBC: Buying Canadian Real Estate Is Risky Right Now

CIBC isn’t calling on the central bank to do anything, but they warned Canadian real estate buyers. “I think there is a risk of getting into the market at today’s rates,” CIBC deputy chief economist Benjamin Tal warned in Nov.

“We are still dealing with emergency interest rates. Let’s remember that these are not normal interest rates, and eventually, they will rise,” Tal added. As rates rise, credit cools (ideally), making home prices a little more unpredictable.

Scotiabank: 8 Rate Hikes Needed To Cool Inflation

Scotiabank is never quite as in your face as RBC, BMO, or National Bank. Still, they have doubts inflation is transitory, and forecast 8 rate hikes to curb it. “We still view the supply disruptions as temporary, but they are clearly more persistent,” wrote Perrault, an economist with the bank.

Adding, “muddying the inflation outlook further is an increasingly blurry distinction between supply-related challenges and those posed by strong demand.”

“If inflation rises more rapidly than we expect, we may need to forecast an earlier tightening along with a potentially higher 2023 endpoint,” read their outlook in December.

The BoC’s sole job is to ensure inflation is close to the target and facilitate liquidity at commercial banks. When commercial banks begin to say the BoC is providing the system with too much money, we have a big problem. The central bank is no longer following its mandate to help ensure liquidity. It’s executing a politically motivated agenda — the opposite action of a sound money issuer.

27 Comments

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  • Kate 8 months ago

    The criminals have returned to the scene of the crime to help determine who the culprit is, I see.

    • Man 8 months ago

      Kate you are awesome and can be fantastic writer.

      • Rick 8 months ago

        I have a feeling we’re going to start seeing tent cities across the land by the thousands.

        • Jared 8 months ago

          Have you been to BC? Tents and homeless in almost every urban park. I live in a 1.1 million dollar house. All of the homes on my block are 1 million + (however was 450k ish before covid). I found a guy sleeping in a garbage bag on my lawn. And there is overt drug use by sketched out homeless people all over

      • Rory McInerney 8 months ago

        Didn’t this guy person just post a couple of days ago about how safe the mortgage market in canada is?

    • Jimmy 8 months ago

      Hahaha! Well said.

      Everything was fine for them until they realized it wasn’t. Now they take to the blame game without even looking at themselves for pushing through mortgages (through creative number manipulation) that didn’t meet the stress test.

      Jimmy

  • RW 8 months ago

    The last point hits the nail on the head and would have been worthy of its own piece. If the Bank of Canada is ignoring high inflation and employment data, what ARE they looking for?

    They said they would stop adding government bonds as well, and bought an extra $5 billion. Tiff isn’t a leader, he’s a competent looking person with a resume that barks on command.

  • Tom Wolfe 8 months ago

    The VIX is low. Tesla split 4 to 1, and fully recovered like an amoeba (with the same amount of press as an amoeba gets for splitting). GTA houses are selling for the new normal (20x what they were 30 years ago). It’s all effing peachy. Unless its not. And it isn’t. I hope you are a permanently employed homeowner, with an indexed pension, no debt, and no plans to move. Otherwise the bitter end is as near as the co-conspirator’s want it to be, and that will be determined by what benefits them, not you.

  • Claire 8 months ago

    So why are private banks the ones calling for increased interest rates and tightening monetary policy? Doesn’t their industry benefit from low interest rates and looser policy? Am I missing something?
    It definitely sounds like the BoC has taken on an alternative priority, rather than target inflation, their goal is to lower the borrowing costs for generous government spending, I assume.

    • Trader Jim 8 months ago

      That’s actually the issue most people would probably miss and why it’s so important to see this kind of feedback.

      This is a VERY generous time for them to be operating. If the BOC blows up the economy, they permanently screw up the cash cow.

      • Claire 8 months ago

        I know! Like, they’re worried about long-term economic destruction and they’re publicly announcing it. When private banks have the higher moral standard, I feel like the bar is pretty darn low. They’re doing fine right now, so if they’re complaining, something must be REALLY wrong.

  • Man 8 months ago

    BOC has no other option but to increase and increase faster than US to be competitive and stay meaningful.

    US is anticipating 4 to 5 rates hikes now for 2022.

    • Darren Witzaney 8 months ago

      BOC actually HAS another option, to allow the currency to devalue, which is an artificial way to stay “competitive”.
      The last two sentences: “The central bank is no longer following its mandate to help ensure liquidity. It’s executing a politically motivated agenda — the opposite action of a sound money issuer.” are a very stark indictment of BOC’s policy. I very much appreciate the writer’s candor.

  • Chuck 8 months ago

    The cost of credit is reflected in all goods and services. So raising interest rates does not help reduce inflation, in fact it exasperates it. Basic macro.

    • Gerald Haw 8 months ago

      The cost of credit reduces demand and capital velocity. You should have learned this in Econ 101.

    • Claire 8 months ago

      Yeah, there’s no theoretical or historical support for your statement that raised interest rates exacerbates inflation, and plenty of the opposite.

    • Jared 8 months ago

      Chuck. Turkeys central bank has a job for you!

  • Brock Clark 8 months ago

    I’m suuuure the banks are soooo concerned about being able to charge more interest on all the suckers that bought into their FOMO.
    The Chartered Banks and BOC are completely in this scam together.
    Anyone who thinks otherwise is naïve.

    • Patrick 8 months ago

      Banks make money on low interest rates. Higher interest rates shrink loan sizes and credit growth.

      They’re highlighting how concerning this high inflation market is for the general economy. Literally every dollar in the country was devalued by 5% officially, but more likely 20% to pay for CERB and the housing market’s hand outs.

      • Claire 8 months ago

        Thanks Patrick, that’s what I was wondering about. In the long-term, low interest rates can benefit banks by stimulating economic activity… inflating it. But short-term, high interest rates can benefit banks via immediate returns on debt. I guess when the economy’s in good shape. High interest rates when the economy’s slowing down have immediate negative consequences for banks. I guess Canada’s economic situation falls into the former category, at least on paper, so the banks’ feedback isn’t totally surprising.

  • Heather 8 months ago

    Tiff should have been given a pink slip for Xmas.
    From September 1973 to November 1991, with some flurries to February 1995, 5-year mortgage rates were double digits. September 1982 rate was 19.41%.
    If the banks want to lend money, maybe they should be a bit more forceful in showing people what their million dollar mortgage would look like at 5, 10 and even 12%. Give them the figures, let them take it home and stew for a few days.
    Need an example? I bought a home in the Fraser Valley in September 1981, with a 1st mortgage at 12.75% assumed and a second at 17% from the mother-out-law. Both my ex and I worked, me doing an 80 km round trip commute to Vancouver on a bus 5 days a week. In 1985, now with two kids, the eldest needed speech therapy. It wasn’t covered under Extended Health. I went weeks, spending my money at the speech therapist. The only thing I bought for myself during that time was a pair of nylons. That’s what high interest rates mean. Yes, you ‘get by’ but it ain’t living high off the hog.
    My condolences to those that get caught up in the forthcoming financial tsunami.

  • Brunolio 8 months ago

    It’s not even funny, but the central banksters of the world are all playing chicken to see which one will kick off the great reset. They know something we all don’t, that is for sure.

  • neil 8 months ago

    The central banks painted themselves into a corner by keeping rates so low since 2009. They waited too long before getting onto a better trajectory in 2018 but then covid hit and they had to dump rates to the floor again. Now it looks like they’re waiting too long again to reverse at least some of the emergency covid cuts. With all these asset bubbles out there the longer they wait the harder it’s going to be to raise rates without causing major shocks. Add inflation and spiking oil prices and it’s hard to imagine how they’re planning to tip-toe out of this corner. Might already be too late to avoid a major shock in the next 3-5 years.

  • Chuck 8 months ago

    Oh boy, I can’t believe the BoC is caving to the marketeers who want rate hikes. The problem is rate hikes are price hikes, the cost of credit is reflected in all goods and services. It won’t help to dampen inflation, it may only exasperate it.

    • Claire 8 months ago

      Rate hikes deflate inflated prices. Cheap credit is reflected in high (currency devalued) prices. Both theoretically and practically. Refer back to Volcker’s high interest rate correcting entrenched, escalating inflation in the 80’s. There’s no controversy on this. (Unlike climate change) Sorry, couldn’t help myself.

  • Trader Jim 8 months ago

    That’s actually the issue most people would probably miss and why it’s so important to see this kind of feedback.

    This is a VERY generous time for them to be operating. If the BOC blows up the economy, they permanently screw up the cash cow.

  • Jen C 8 months ago

    The housing crisis in Canada is the result of a long history of inequity in Real Estate. CMHC’s interference in mortgage lending has created a bigger gap in Canada between Survival and Wealth. The Canadian FED has eaten that up. We’ve just traded one fat-cat for another in the chair at the head of that “advisory” table.
    Every policy they have enacted in the last umpteen years has made it harder for the average Canadian to acquire and maintain any wealth. Buyers who want to live in their homes have been the ones nudged out of the market, while big investors have continued to insulate their 24-carat walls.
    Organized crime has never been fatter.
    What we’ve needed: Higher interest rates. Lower Stress Test. Owner-occupied incentives that don’t include the First-Time Home Buyer Incentive (The craftiest contract, designed to take money from unsuspecting young Canadians in order to pay back all of the Fed’s bad decisions).

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