Time for your cheat sheet on this week’s top stories.
Canadian Real Estate
The Bank of Canada is ignoring the first signs of inflation meaning it needs to pursue a much more aggressive policy — which is likely to trigger a moderate recession. Oxford Economics explained the policy rate at 3.25% this week means Canada is facing the highest policy rate since 2008. It’s going to lead to a slowdown in economic growth, but they’re stuck between a rock and a hard place. Higher rates will reduce consumption and are likely to cause a recession. However, leaving inflation unchecked will result in a deeper recession, so they’re choosing the lesser of two evils. Consequently, Oxford Econ has upgraded the coming recession from mild to moderate.
The Bank of Canada hiked interest rates this week, explaining inflation is still climbing and real estate was unsustainable. The media focused on headline CPI falling from 8.1% to 7.6% in June, which occurred almost exclusively due to gas prices. Core inflation, the central bank’s preferred measure, increased from 5.0% to 5.5% over the same period. Since core inflation minimizes volatile components like gasoline, it came in lower but it’s still climbing. This means that inflation is still climbing, reinforcing the need for higher interest rates.
BMO is hiking their year-end forecast for interest rates in Canada and the US. The bank made a 25 basis point upward revision to their police rate forecast, bringing Canada to 3.75% and the US to 3.75% and 4.00%. They don’t see much movement next year, as they believe central banks will pause to see the impact.
Canadian employment suffered its third consecutive decline in July, according to Statistics Canada. The agency reported that seasonally adjusted jobs fell by 39,700 jobs in July, bringing the unemployment rate 0.5 points higher to 5.4% for the month. Despite the sharp climb, BMO explained this is still a rate so low it was rarely seen prior to 2020 — the market is still very much overheated.
The growth of Canada’s narrow money supply is rapidly decelerating in growth, which typically precedes a recession. Annual growth of the M1+ fell to 5.1% in June, down from the record 30.5% in February 2021. It’s the lowest rate since June 2019, when it indicated a slowdown was on its way before the pandemic. It’s also decelerating at an unusually fast rate, which the Bank of Canada considers a precursor to a productivity slowdown.