We won’t know until tomorrow, of course, whether the Bank of Canada will lower its benchmark lending rate. But after its move in June to 4.75 per cent from 5 per cent – the first cut since a historic run-up in rates over the two previous years – observers are largely predicting the bank will continue its new easing cycle. Below, we try our best to read Bank of Canada Governor Tiff Macklem’s mind.
Up top
- Beds: Fairfax Fairfax Financial Holdings Ltd. has struck a deal to buy mattress and bedding retailer Sleep Country Canada Holdings Inc. for $1.7-billion, Susan Krashinsky Robertson reports. The B.C.-founded mattress retailer, which trades on the TSX under the symbol ZZZ, would become private if the deal is firmed up.
- Bots: Canadian artificial intelligence startup Cohere Inc. has raised US$500-million in a new financing round to compete with OpenAI, Anthropic, Google and other well-funded rivals seeking to develop and profit from generative AI, Joe Castaldo reports. The latest funding brings Cohere’s value to US$5.5-billion.
- Biden: The President charted a bold course for the economy, The Globe economics team finds, but it was overshadowed by rising prices. They lay out why landmark investments will prove influential for years. John Rapley argues Biden’s economic legacy can be compared to Reagan, if not FDR.
- Beware: The Competition Bureau is publishing guidance on what may constitute corporate greenwashing as it begins consultations about implementing the contentious measures, Jeffrey Jones writes. Jameson Berkow, meanwhile, reports on other unknowns surrounding the new bill.
In focus
Graphic design is my passion.Photo illustration by The Globe and Mail
From a two-decade high of 5 per cent last year to 4.50 per cent tomorrow?
The highest interest rates in two decades have done their job, curbing consumer spending and cooling the overheated housing market, Mark Rendell reports. I asked him to guide us through the bank’s calculus as it solves for economic unknowns here and abroad.
Beyond the decision itself, what are you looking for?
If financial markets are right, a rate cut on Wednesday is a done deal. The bigger question is what signals the bank sends about future rate cuts. The language used at the last rate decision in June was more dovish than expected: “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,” Macklem said.
That’s not a promise, but it’s a pretty clear window into the Governing Council’s thinking. If Macklem repeats this kind of language in the press conference on Wednesday, or signals even more eagerness to get borrowing costs down, then markets are going to expect a rate cut in September and further cuts through the fall. If he sounds more hawkish, playing up concerns about core inflation and strong wage growth, then bond traders are going to pare back bets on a September cut.
The vast majority of observers are expecting another cut. What is holding back the small minority from making the same prediction?
There are always hawks among the doves. And there are a few reasons for caution. Inflation came in stronger than expected in May. And while the June numbers were weaker than predicted, the bank’s two measures of core inflation, which strip out the most volatile price movements, ticked up on a three-month basis. Likewise, although the labour market is clearly softening, wage growth remains above what the central bank is comfortable with, at least according to the Labour Force Survey.
Other measures show wage growth moderating more quickly. And I’d emphasize that most of Bay Street is expecting another move from the BoC this week. Twenty-two out of 30 economists polled by Reuters last week had penciled in a quarter-point cut for Wednesday.
How and when does a cut actually get put into effect?
It’s like in Genesis: And the BoC said “let there be a rate cut; and there was a rate cut.”
As soon as the bank announces its monetary policy decision in a press release at 9:45 a.m. on Wednesday, the rate cut (if there is one) will be in effect. In practice, the policy rate is the Bank of Canada’s target for the interest rate at which large commercial banks like RBC and TD lend money to each other on an overnight basis. This acts as a benchmark for other interest rates throughout the economy, and BoC has various tools to keep the overnight rate at or near its announced target.
Do the governors weigh outside forces such as, say, divergent visions for the American economy from the presidential hopefuls?
You bet. Anything that could affect inflation gets thrown into the cauldron. If you look at the Bank of Canada’s quarterly monetary policy report, the first section is always dedicated to global factors. What’s happening in the U.S., in particular, has a huge impact on the Canadian economy: They buy a lot of our stuff, and decisions by the U.S. Federal Reserve have a huge impact on Canadian bond markets, exchange rates, etc. If Donald Trump gets elected, runs the U.S. economy hot and throws up a bunch of tariffs, that’s going to influence the Canadian economy and therefore Bank of Canada monetary policy decisions.
The bank has said it can only do so much to help Canada’s housing crisis. Does the governor meet regularly with policy makers?
The Bank of Canada governor sits down regularly with the finance minister, although the principle of central bank independence means that Chrystia Freeland doesn’t tell Tiff Macklem what to do. On the question of housing, the BoC has thrown up its hands in exasperation. Housing is unaffordable when interest rates are low and home prices are rising quickly. And housing is unaffordable when interest rates are high, and few new homebuyers can qualify for a mortgage. In effect, the BoC has said housing affordability is a supply problem: There’s simply too few homes being built in Canada, especially given the historic pace of population growth.
Of course, some economists challenge this narrative. But the federal government itself seems to have bought into it. Since last summer, the Liberals have gone all in on policies aimed at boosting home construction: tax relief for developers building rental units, money to convince municipalities to ease zoning restrictions, etc. In several parliamentary appearances, Macklem has given the thumbs up to this policy shift.
Charted
Shares of CrowdStrike fell 13 per cent on Monday. Analysts downgraded the stock on concerns over the financial fallout from a global cyber outage last week, in which an unfortunate update to its security software crashed computers powered by Microsoft’s Windows operating system. That disrupted internet services across the globe, which is a problem, seeing as how a lot of the world runs on the internet now. It was a big moment for paper.
The lookout
On our radar and reading list
Micro: Earnings today include Alphabet, Tesla, Canadian National Railway, First Quantum Minerals Ltd., National Bank Holdings Corp.
Macro: In Canada, new housing price index for June. Existing home sales for the same month are reported in the U.S.
Mortgages: Rob Carrick coins a new term for aspiring home buyers: “Home Ownership 45″
Markets: Investors hope the first batch of “Magnificent 7″ earnings will calm a recent tech rout.
Morning markets
Global stocks were mixed as investors turned their attention to major U.S. corporate earnings, including the latest results from Alphabet and Tesla expected after the bell, as well as economic data. North American market futures were mostly flat.
Overseas, the pan-European STOXX 600 was up 0.63 per cent in morning trading. Britain’s FTSE 100 added 0.21 per cent, Germany’s DAX advanced 1.26 per cent and France’s CAC 40 gained 0.52 per cent.
In Asia, Japan’s Nikkei closed flat, while Hong Kong’s Hang Seng slid 0.94 per cent.
The Canadian dollar traded at 72.67 U.S. cents.