Tiff 2.0

Wednesday morning Tiff will cut again. The Bank of Canada rate will fall to 4.5%. The prime at the banks will be 6.7%. Lines of credit, business loans and variable-rate mortgages will all droop.

Our CB has gone cowboy. It was the first major in the western world to cut its policy rate last month. Now it will be the first to do it again four weeks later. Bay Street is lining up behind projections that the cost of money in this country will decline twice more by Christmas. That 5% inflation-curdling and real estate-crushing level we were at for a year will then sit at 4%. Polling tells us then – when rates have tanked a full percentage point – people will start shopping for, and buying, houses once again.

But wait. There’s controversy here. Gov’nr Tiff has critics and skeptics snapping at his heels.

Some people, like Scotiabank’s renegade egghead Derek Holt, just don’t buy the argument that the inflation war has been won.

“The dominant opinion across competitor economists is that Canadian inflation continued to ebb in June,” he writes. “Horse pucks! I believe that’s confirmation bias and a wholly inaccurate reading of the numbers.”

After four one-handled readings in a row for trimmed mean and weighted median CPI, May’s readings popped higher by 4.1% m/m SAAR and then came in at 2.9% m/m in June. It’s not the decelerating y/y headline CPI reading that matters since it is heavily influenced by year-ago base effects and energy prices. What matters is the evidence on underlying inflation at the margin which is why the BoC has come around to looking at the smoothed m/m trimmed mean and weighted median gauges.

Yay. Horse pucks, bro. Sheesh.

Holt has been a Tiff detractor for months, suggesting the guy is not up to the task. “Macklem behaves erratically. His forward guidance is terribly unreliable as we’ve seen throughout his tenure. This is a central bank that wears it as badge of honour when it surprises markets on game day and I swear there is a mischievous element to doing so. This is not the Fed … or any central bank that provides explicit forward guidance. Don’t waste your time on it when it comes to the BoC.”

The economist says inflation has not disappeared. Governments are still pouring gas on the fire with excess spending and housing incentives, and will only make things worse as the fed election looms – “given that the left-wing Liberal-NDP government is performing so poorly in the polls.”

Also, wage gains are accelerating and threaten inflaming the CPI. Holt argues the economy is stronger than it seems or that the CB anticipated, and inflation expectations are alive and well in society. In short, Tiff may want accolades, headlines and a big smooch from Chrystia, but in reality this rate cut is a gamble.

Not so, says CIBC’s chief economist, Avery Shenfeld. Tiff is right to drop the rate. In fact, he must. He needs “to look past every little blip in the CPI, and focus instead on two key elements of the big picture. First, the economy is now operating with visible disinflationary economic slack, as evidenced by labour market softness… Second, considerable progress has been made on inflation in the past year, and the conditions are in place for that to continue.”

Shenfeld argues mortgage interest costs “now represent the lion’s share of the gap to the 2% target, and rate cuts will bring that component of the CPI down sharply.” He agrees wages are “looking overheated” but that this should cool next year. Overall, by December, “rates will have dropped a full percentage point.”

Well, out of the towers and down in the trenches, things are looking even more like the rear end of the equine.

“The rate cuts will keep coming as the Canadian economy circles the bowl,” says crusty mortgage dude and scatological podcaster Ron Butler. “Unemployment will soon become a major issue in Canada: It’s going to get worse. What makes Bank of Canada rate cuts a certainty is ongoing job losses in Canada particularly Ontario. Don’t be fooled by jobs reports showing small rises in unemployment. It’s going to take off.”

Oh, and remember that panic-listed assignment-sale McMansion in Picketing we showed you the other day? Well, on Tuesday another one on the same street materialized. Also an assignment. Also not finished construction. Also over a million (for a semi). And the seller will throw in ten grand in cash while forfeiting a fat deposit.

Yup. That’s a lotta pucks.

About the picture: “Loooong time reader, doing my best to follow your sensible advice over the years,” writes Chris. “Fred (our 2 year old Irish Doodle) is living his best life in Waterloo thanks to your wisdom, looking forward to his next dog park sprint.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’