How deep?

The next rate cut comes Wednesday morning. Will it be the one that pumps juice back into the housing market?

Unknown. But we do expect a mother of a chop.

The cut will be at least half a point, and (according to one bank’s senior economist) maybe three-quarters. Avery Shenfeld of CIBC suggests the Bank of Canada will ‘front-end load’ all of the remaining cuts of 2024 into one swell foop, taking the policy rate way down to 3.5%.

That would drop the chartered bank prime to 5.7% – a vast change from the 7.2% we lived with post-pandemic when the CB was killing inflation. This would take VRMs down around 5% – still a big premium over the fixed rate, but with more cuts likely in 2025, a choice more people are making.

So what are the odds?

The market is saying 75% chances of a 50 bps plop. Scotia’s cowboy economist is giving it a 65% hope with 25% probability the cut will be just a quarter point and only 10% that Shenfeld is right. But Holt as well is leaning into a 75 pbs lower B0C rate by Christmas.

Why is this happening?

Simple. The rate of inflation is 1.6%, below the bank’s target. This raises concerns rates were too high for too long and inflation could go negative. As detailed here the other day, the guys running the place fear deflation since it could lead to economic torpor, increased unemployment, reduced corporate revenues and a slump in consumer spending as people wait for prices to fall. Oh yeah, and a real estate meltdown. Maybe.

Second, Trump. Seriously. If he’s elected and enacts his oft-repeated promise of a global import tariff of at least 10%, the Canadian economy will be schlonged. Economists are warning of a GDP drop of more than 1.5%, an inflation increase and a reversing of interest rates – which could rise almost 2%, in part to rescue the dollar. The last thing Canada needs is an America-first president.

A rate drop now will (a) reflect that the battle against uncontrolled inflation has been won, (b) add some gentle stimulus to the real estate market which is a catalyst of economic growth, (c) increase consumer spending as a buffer against the potential Trump-induced slowdown of late 2025 and 2026, as well as (d) deflation and (e) because Chrystia wants it. The federal government as a whole wants it. So do the provinces. And the Chamber of Commerce. Plus the real estate boards and the banks. Everybody but the poor schmucks who buried their retirement funds in GICs or variable-interest accounts is on the bandwagon.

The prevailing prediction is the BoC rate will decline to 3% by the turn of the year. Derek Holt says it will stay there for all of 2025. Others disagree, calling for up to three more decreases. There is conflict now on what, exactly, we face. Is this a crisis – stressed consumers, deflationary pressures, American turmoil – that requires a drastic rate drop?

No way, says Holt. “Not in my books. Not in the slightest. The constant gloom that is pumped by our competitors is exaggerated and unhelpful. The narrow, insatiable self-interest of the most vocal supporters of aggressive easing in the real estate sector is not considering the broader ramifications. This is an economy that has been remarkably resilient in the pace of a nearly five percentage point rise in short-term borrowing costs.”

In fact, he says if there’s a problem it might be that the central bank has cut too aggressively. The guy adds that Canadians should stop moaning and bitching and use some of the savings they have accumulated to go out and buy stuff.

“For years now—including at present—Canadians have been saving in ham fisted fashion. The personal saving rate of about 7¼% is about 4¼% above the US personal saving rate. The cumulative rolling amount of savings above what an extrapolated trend line would have predicted sits at about half a trillion dollars. This doesn’t include gains in wealth derived from investments in stocks, bonds, and real estate net of changes in debt; using net worth relative to a trend line shows about C$2 trillion in net worth above a trend line and… it is spread across all income cohorts.”

So, a big rate cut on Wednesday could unwisely unleash a torrent of money, much of it destined for real estate. Complications would be a Trump win, and the coming Canadian federal election. The betting is that the Libs will open the spending floodgates before then, since they’re now in the popularity sewer. Or maybe there will be deflation. Locusts? Dunno.

In short, this is a moment of uncertainty. More will be known in two days. Much more in 16 days. What a splendid time to ignore everything. Go find some firewood.

About the picture: “Genie is the slowest dog in the world,” writes the poster known as Penny Henny. “Here she is after a walk around the block.”

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

Source: https://www.greaterfool.ca/2024/10/21/how-deep/