The Bank of Canada’s first cut to the cost of borrowing in years will give Canadians a measure of relief – even if not in their pocketbooks just yet.
In bringing its key lending rate down to 4.75 per cent from 5 per cent, the central bank also signalled further drops on the horizon – a shift in policy that could boost consumer spending and business investment, as well as shake loose Canada’s taut housing market.
In short, Tiff Macklem’s first cut in his four years as governor (he can move the number down, too!), is just a little off the top – at least for now. But for a country coming off years of bitter monetary medicine, it’s not insignificant. The pace of inflation may be slowing, but anyone who pays rent or a mortgage is finding small comfort in the falling price of fish sticks.
In today’s edition, we’ll look at how the cut will play out:
- The impact on would-be homeowners and Canadians facing mortgage renewals
- The cut’s influence on the health of the economy
- Canada is the first of the G7 countries to move. Who will follow?
But first, a short programming note: I’m Chris, a writer and editor who joined the Report on Business in 2008 just as reporting on business became intensely interesting for extremely regrettable reasons. (Shoutout to Lehman Brothers.) Beginning today, this newsletter will aim to highlight the most interesting people and business stories shaping our world, and to provide you with not just the news, but a higher vantage point. I look forward to landing in your inbox, and to hearing what you think. You can e-mail me at cwilsonsmith@globeandmail.com
Canada’s economy: A view from the clouds
The cut is the first the central bank has made in more than four years, and signals an easing of a prolonged and aggressive campaign to fight inflation by hiking lending rates.
In describing the outlook for Canada after years of financial pain in households and across the economy, central bank chief Tiff Macklem took to the sky: “So far, it is looking like a soft landing. The plane hasn’t landed yet, so we’re not cheering yet. But I would say the runway’s in sight.”
But as Matt Lundy notes, the money quote for most consumers is near the bottom of his opening statement: “If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2-per-cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate.”
Mo’ money, mo’ mattresses
If more cuts are indeed on the horizon, more households will have more money freed up from their debt obligations. That means more spending on other stuff: The dryer that quit on my family four months ago might finally get a replacement this fiscal year, should my household co-CEO agree.
- That kind of sentiment is good news for retailers, which have been struggling with sales as worried consumers have kept their wallets shut over the past couple of years.
- Per capita spending on goods has fallen for 10 straight quarters, a streak that could end in the coming months.
- Stewart Schaefer, president and CEO at Sleep Country Canada Holdings Inc., said the slowdown in discretionary spending had been going on for about 18 months – and he hopes the cut will help free up money for consumers.
Retailers are hoping the rate cut will bounce (see what I did there) Canadians back to making bigger purchases.Getty Images/iStock
The real estate market: Still a full house
Is the cut also good news for real estate? Most likely – but don’t expect a sudden whoosh from doors swinging open to new homebuyers.
- The cut could spark the real estate market back to life as would-be buyers get the nudge they needed to pull the trigger.
- Royal LePage president Phil Soper tells Rachelle Younglai his firm is forecasting a “material lift” in home sales.
- But analysts aren’t expecting a flood of new buyers – and current homeowners are unlikely to find significant relief in the short term.
In fact, as The Globe’s Erica Alini found, Canadians in many common situations will save less than $100 a month. “And that small help will only go to those with floating-rate debt, which includes adjustable- and variable-rate mortgages as well as lines of credit,” she writes.
But there could be more help on the horizon. Rob Carrick describes today’s cut as a long-awaited U-turn finally at hand. We won’t see the extreme lows of the pandemic any time soon, but the central bank will see to it that borrowers will pay less, “slowly and haltingly.”
This chart assumes the best variable-rate mortgage available nationally to homebuyers declines from 5.95 per cent to 5.7 per cent. So, most mortgage payment relief will be minimal at first – and likely not enough to entice a flood of new contestants into Canada’s tight housing market.
Why the bank acted now
To keep prices at bay, the bank has been keeping interest rates high to curb demand for goods and services. That campaign appears to have worked, Mark Rendell writes.
- After hitting a peak of 8.1 per cent in the summer of 2022, annual consumer price index inflation fell below 3 per cent at the start of this year and hit 2.7 per cent in April.
- Whether or not you believe the campaign has worked, Tiff Macklem feels good about it. When asked by a reporter whether another cut is coming in July, he responded: “Let’s just enjoy the moment for a bit.”
- Enjoy? I suppose it’s a matter of perspective. The Decibel delves deeper into the rate cut and its consequences in its latest episode. You can listen up here.
What’s next
The Bank of Canada will now have the better part of two months to absorb economic data here and abroad before its next meeting. Most economists are expecting another cut from that meeting in late July. But as Darcy Keith notes, investors are not quite as confident. Who wins between economists and investors in a street brawl? I’ll get back to you as soon as I can find a satisfying answer. (Spoiler: No one. No one wins.)
Today: The European Central Bank, which oversees monetary policy for Germany, France and Italy, is expected to cut.
June 20: After holding its key rate at a 16-year high in its last decision, many believe a cut is also on tap for the Bank of England.
September: It’s getting harder to guess what the U.S. Federal Reserve will do on the basis of a stubbornly strong economy (how rude), but it’s widely expected to cut in the fall.
The divergence between the Bank of Canada and the Fed could put downward pressure on the Canadian dollar – good news for exporters, not so much for importers or Canadian consumers who like to buy their booze south of the border.
Macklem played down this concern in the press conference: “There are limits to how far we can diverge from the United States, but we’re not close to those limits,” he said.
The metaphor market
Sheryl Crow might be surprised to learn of her place in the discourse of Canadian economics.Ed Rode/The Associated Press
The rate cut also spurred mixed results in the intraday puns and metaphors market.
James Orlando at TD Economics looked next door:
“Like that one neighbour who has let their yard become overgrown, the BoC has heard the complaints and decided to bring out its policy trimmers to cut rates.”
Shannon Terrell, a financial expert at NerdWallet Canada, conjured/floated this image:
“Don’t expect instant magic following this 25 basis-point rate cut. The Canadian economy is a ship that turns slowly. Reducing the policy interest rate is a welcome change in direction, but we won’t see any drastic change in scenery overnight.”
Royce Mendes of Desjardins chased pucks in deep:
“By all accounts, the Bank of Canada has successfully stick-handled past the recent inflation spike. By slashing rates today and signalling that there’s more to come, policymakers have shifted their focus towards defending against a possible recession.
OK, these next two aren’t metaphors, but an earworm. And now that it’s stuck in my head, I thought I’d do you the same kindness and pass it on.
Douglas Porter, chief economist at BMO, turned to Sheryl Crow:
“The first cut may not necessarily be the deepest, but it is the most significant, as it marks the official turning point after more than two years of restrictive policy.”
Randall Bartlett, Senior Director of Canadian Economics, made it a duet:
“The first rate cut may not be the deepest, but it won’t be the last.”
I am aware Sheryl Crow did not write this song, but she did it best. Disagree? Let me know why. (But please be kind; I still haven’t had my fourth coffee.)
What else we’re watching today
Nvidia has overtaken Apple as the world’s second-most valuable company.
The chipmaker’s valuation popped over the $3-trillion mark yesterday as it readies a stock split that could give more investors a more cheaper entry point into the AI wave.
- Nvidia’s stock has surged 147 per cent so far in 2024. Is that good?
- Microsoft remains the world’s most valuable company. For now.