No Change in the Prime Rate...For Now
Tuesday Dec 12th, 2023
Here's a few thoughts around the Bank of Canada leaving their prime lending rate unchanged last week...
By Steve Kornbluth of Safebridge Financial
1. The End of Rate Hikes The BoC has subtly indicated the end of rate hikes, though not officially announced. With the economic slowdown well underway, restrained spending due to higher interest rates, increased consumer debts, and signs of the economy no longer being in excess demand, it's obvious rates are at their peak. Albeit, like I mentioned last week, BoC Governor Macklem would still come out talking tough, and that the bank is prepared to act if inflation proves to be sticky or rises again (which is exactly what he said).
2. Anticipating the First Rate Cut The BoC's first rate cut might be on the horizon sooner than expected. Economic data indicates a slowdown, and inflation is cooling rapidly. The bond market suggests a 50% probability of a cut in March, with some economists expecting those odds to rise further.
3. Potential for More Rate Cuts in 2024 Market expectations project three rate cuts in 2024, but economists believes there might be more. They attribute this to the delayed impact of previous rate hikes; remember, it can take 12-24 months before we feel the full bite of rate increases. That bite has been delayed longer than usual due to increase pandemic savings, higher immigration, and variable mortgages where payments did not change. This combination delayed the impact of higher rates, causing the BoC to raise rates higher and quicker than ever before. With these factors behind us, the economy is likely to deteriorate at a much more rapid pace forcing the BoC to cut rates more aggressively.
4. Governor Macklem's Strategic Shift BoC Governor Macklem's recent shift in emphasis provides the Bank with more flexibility. While he previously insisted on inflation returning to 2%, he now suggests waiting until we're clearly on a path to 2%, allowing for a more subjective determination of when to implement rate cuts. This statement implies that as long as we are moving towards that 2% mark, we don't necessarily need to reach that 2% inflation target before cutting rates.
Despite Macklem keeping rates where they're at, he doesn't want to open Pandora's box like he did in January when he announced a rate pause which caused bond yields to fall, and real estate values to heat up again. This time, he's choosing his words carefully, but knows it's just a matter of time before he will be pulling the rate cut lever.
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With warm regards,