Goldilocks

It’s CB week, kids. What fun.

Both the Fed and the Bank of Canada review their interest rates tomorrow. A big deal in both countries, since public debts are erupting, real estate is a mess and Trump’s antique economic policies have set the world alight. Will calming hands and level heads at the central banks save us from politicians who govern like windvanes?

Dunno. But this is interesting…

Odds that the Fed will cut its rate tomorrow: 89.2%. Odds that the Bank of Canada won’t: 97%.

Now let’s remember where we are. The US rate is 3.5-3.75%. The Canadian one is 2.25%. Americans are paying about 6.5% to get a mortgage. Here it’s 4%. The Yanks have $38 trillion in public federal government debt. We have $1.2 trillion. Kiddos in both countries lament they cannot afford to buy real estate. And the average age of newbie house purchasers in America and Canada has rocketed up to 40.

Tariffs are hurting the US. That’s exactly why inflation is higher there and explains Trump’s unveiling of a $12 billion package yesterday to bail out farmers. The massive US tariff on China resulted in a plunge in American agricultural exports to that country, decimating farmers – many in key Red states. Tourist revenue in the US has crashed as visitors go elsewhere. Countries around the world, like ours, are working hard on forging trade alliances that have nothing to do with the White House.

So, US rates will fall plus the Fed may be seriously more politicized in 2026 as the president’s hand-picked lackie takes over the Fed in May. Trump wants cheap money to sugar-up the economy, inflate assets, make debt cheaper to carry and deflate the dollar so tariff damage can be minimized.

Us? Not so much.

Our CB has already signaled its current rate is considered ‘neutral’. In other words, it does not stimulate nor brake the economy. Not too hot. Not too cold. And our Goldilocks governor, Tiff Macklem, is going nowhere since Canada’s central bank is apolitical, indy, maple-flavoured and credible. It also gave us a prime minister, the first progressive conservative one since I sat at the federal cabinet table.

(By the way, did I ever mention the little table in the foyer of the cabinet room that is covered in various antacid tablet bottles and vials? Well, it’s there. And well used.)

All this matters in a world that runs on borrowed money. Like ours.

One reason real estate has been circling the drain since the summer of 2022 has been interest rate policy. When Covid was here we had an emergency CB rate of one quarter per cent, mortgages dropped below 2%, and real estate exploded. Price gains were historic amid FOMO, bully offers, blind auctions and multiple bids.

When post-pandemic inflation roared around the world, we weren’t immune. The cost of living jumped to 8% in Canada and our central bankers quickly jacked their rate to 5%. Real estate croaked. The road back down to the current policy rate has been relatively swift, but after seeing mortgages as cheap as 1.4%, Canadians have been loathe to borrow at four times that level.

As detailed here, it’s resulted in a 20% drop in prices, record levels of unsold inventory, an epic crash in construction and MLS sales so low realtors are delivering Uber Eats and borrowing money from Gen Zees. The profound hope in the house-flogging biz was that 2026 would bring back home loans at 3%, or even a tad lower. Combined with the dip in asking prices, that would start the market smoldering again.

Alas. Not happening.

Not only are all major bank-based forecasters in agreement our CB has shifted into neutral – no more cuts coming – but that prescient econocowboy Derek Holt has now issued a fat report on why higher rates are a certainty. And maybe soon.

“Scotiabank Economics expects the new year to extend the Bank of Canada’s 2¼% rate pause before migrating toward 50bps of policy tightening over 2026H2 that may turn out to be greater and earlier than expected,” he says. “This is a view we’ve had since September with markets recently moving in this direction.”

Half a point more in the second half of 2026, or even earlier? Hey, D, how come?

Well, first, the economy is in much better shape than all the moaners, whiners, bitchers and entitled snots in this blog’s steerage section believe. “The job market is ripping with 181,000 jobs created in the past three months, the unemployment rate is tumbling down to 6.5%, trend core inflation remains materially above the 2% headline target, and deficit-financed stimulus intensified.”

In other words, we don’t need a rate cut. It’s cool. Besides, cheaper money would just stimulate consumer borrowing and spending, adding stimulus to an economy that doesn’t need it since the feds are now wildly throwing money around.

Moreover, with inflation at 2.2% and the bank rate at 2.25%, the ‘real rate’ (the nominal rate minus CPI) is about zero. Any cut would take us into negative territory – which is clearly not required given the decent shape the economy’s in. Besides, if we ran into a crisis next year or in 2027, the CB would have little room to drop the cost of money to deal with it. And then there’s government debt, which is rising fast, and all the bonds that will be issued or rolled over to finance it.

In short, says Holt, the models point to hikes. He agrees. By this time next year you may really wish you’d locked into a mortgage at 4%.

About the picture: “Man it’s awesome what you do and much appreciated. Long time reader, rarely found in the steerage section, I have been reading since 2010? (first emailed you in 2012) and still reading daily on holiday,” writes Dave. “Have sent you photos of our Golden Retrievers a couple of times. My wife and I are in Roatan chilling like this local cat after some left over shrimp tails.  We were convinced it was female until my Vet wife had a closer look today and confirmed she is a he. We named him Ray and he is as relaxed as we are with our Balanced portfolio based on 13+ years of reading your blog and understanding you just need to relax a bit in uncertain times. He follows us after dinner each night and sleeps on our porch overlooking the ocean.”

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

Source: https://www.greaterfool.ca/2025/12/09/goldilocks-5/