Front Burner - Life's tough. Will the interest rate cut help?

Episode Date: June 7, 2024

An interest rate cut of a quarter of a percent might not sound like much. But as the first cut in four years following the COVID-19 pandemic and all the economic upheaval that followed, it's a big deal. And it could be the first of several in the months ahead.But what does that mean for you? How does that affect your ability to afford things like a mortgage, a car, groceries, or growing your business? And after a rocky couple of years, do people even have faith in the Bank of Canada's ability to keep things under control anymore?CBC senior business correspondent Peter Armstrong breaks it all down, including insights from an exclusive interview with BoC governor Tiff Macklem.Help us make Front Burner even better by filling out this audience survey.

In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through angel investment and industry connections. This is a CBC Podcast. Hi, I'm Jamie Poisson. In the last couple of years, the Canadian economy has gone through the biggest shock in inflation and the biggest shock in rising interest rates in a very, very long time. It has been crappy. As a result of both inflation and the remedy, rising interest rates,

people's lives have gotten so much more expensive. Everything from eggs to cars to mortgages to rent. For a while now, our economy has basically not been growing. People have lost jobs. I could go on, but you know, because you have been living it. Trying to find different ways to bring in extra income, just to be able to provide for myself. We've had to sell one of our vehicles, cancel plans, cut back a lot on spending just to be able to afford our home. I certainly look for items on sale. It is a big concern. Earlier this week, the Bank of Canada finally pulled the trigger and cut its benchmark interest rate. It was 5%, now it's 4.75%.

So it is not a huge difference. But it's also a signal that they think we are headed over the other side of that proverbial hill. That interest rates are on their way down even more. That the bank believes, at least for now, inflation is under control. Today, my colleague Peter Armstrong is with me. He is the CBC's senior business correspondent. And this week, he actually interviewed Bank Governor Tiff Macklin. And we're going to talk about how this could all play out from here. All right, here we go.

Peter, hey, always great to have you. Jamie, hi. Are you as excited about monetary policy as I am? I am. I actually am. I love talking about this stuff. So you got to sit down with Tip Macklem, governor of the Bank of Canada this week. I am legitimately jealous that you got to do that. And what did he tell you about why he and the bank decided to finally cut interest rates? Yeah. And it was interesting, if only because I went back and forth so many times leading up to the decision that like literally going in there, I texted somebody saying, I think they're

going to hold. And then they came out with a cut. And so I wanted to know from him, like how close was it? And in the end, he said it wasn't very close at all, that the governing council, the group within the Bank of Canada that decides this stuff was unanimous and felt that the data finally matched up to the expectation. We talked a lot coming into this about the word sustained, right? If you go back to what we said the last few meetings, we said we're looking for further and sustained easing in underlying inflation. And when we looked at the run of data since the beginning of the year, inflation has been coming consistently down. And with four months now in a row, it's looking more sustained so yes there was a

consensus across the governing council that it was time it is time to reduce the degree of monetary restraint and you know we had seen all these data coming in that inflation has been coming down the job market has cooled the economic growth has sat around zero for months now. And, you know, as more bits of those data came in, we were all asking ourselves, is it sustained enough? And I guess what we found both in the interview and in this decision was that, yeah, it was sustained enough to warrant a rate cut and in fact, kind of blow the doors open to future rate cuts as well. And what did he say about future rate cuts? When can we expect them? How quickly might they come down?

Yeah, so I've just brought up the actual, his opening statement before the news conference yesterday, where I think he says it as clear as can be that if inflation continues to ease and our confidence in inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate. Now, there's a ton of caveats kind of built into that. But remember, this is a bank that as recently as its last and second last decisions were saying they weren't quite sure if there was enough in the data to warrant any cut at all.

So saying, listen, we think if the data back us up, if everything happens about as we expect it's going to, then yeah, we can get moving on the rate-cutting train, as it were. What are economists predicting? Like, just to get a little bit more clarity on exactly when we could expect these rate cuts and by how much, what are economists saying? So there's two really key ways of kind of measuring that. One is the survey of economists that you have all these economists that come out and say this is what we think is going to happen. And the other is just markets themselves, index swaps, where investors can kind of bet where they

think things are going to be. The kind of consensus is that we're probably going to see as many as three rate cuts by the end of this year. Frances Donald, who I think is one of the best economists in the land, she's the global chief economist at Manulife Investment Management. She says she's expecting eight rate cuts between now and the end of 2025, so the end of next year. But eight cuts, Jamie, that's a lot. And just quantify that a little bit more for me. What does that look like?

It definitely doesn't look like where we were when rates were kind of rock bottom during the pandemic. Right. Right. So, yeah. And he's he's made that clear a bunch of times. I think it it is reasonable to expect that they'll come down, but they probably won't come down to pre-COVID levels. We had 10, 12 years of unusually low interest rates post-global financial crisis. I think there's good reasons to believe that we're not going back to those very low rates. So getting back down to probably around

like between 3% and 4% is where I think people expect the bank to be. But, you know, as I say, there's some pretty heavy caveats in that, right? Like, if the economy continues to evolve as we expect, well, when was the last time the economy evolved as we expected? It never does. So there's a lot of hedging going on there as well. Look, there's like a bit of celebration around this, right? People are like, oh my God, finally. But just take me through what there is to be concerned about here.

Well, there's a ton to be concerned about. One, you know, we have spent basically the last two and a half years talking with the Bank of Canada about the risks of over and under tightening, that if they do too much and raise rates too far, they'll slow the economy and cause more pain than is necessary. But if they don't do enough, they'll let inflation get carried away and it'll cause more pain than necessary and force the bank to take even more drastic measures down the road.

All of that was really theoretical. It was frankly kind of ethereal until now. That threat, that risk is only now underfoot. And really only now are we getting to see the impact of all of these years of interest rate hikes and all of the sort of economic chaos that came before it, the supply chain disruptions and wars in Europe and the Middle East, all of this stuff that's going on is really coming to, the risk is coming to a head right now. The idea was that they could slow the economy just enough to get inflation under control without dipping into a recession. And that's worked so far the question is what happens now and again the theory here is that it takes about 18 months for

interest rates to really work their way into the economy and get fully absorbed the last rate hike was only 11 months ago so the economy is still absorbing the can i call it the negative effect of the slowing effect of rate hikes, even as we're now dropping rates, hoping to sort of blunt that negative impact. And the economy is going to be a little bit wobbly. And it has zero room for margin for error right now, because we're right at 0%. That if the economy slows even a little bit from here, then you're looking at probably a technical recession, if not an outright bad recession that would really have a negative impact on people's bottom lines, on households, on businesses, on governments, on everything.

The other sort of risk here is that maybe inflation isn't done with us just yet. We've seen that happen in the United States, and inflation's really come back alive in the U.S. and in the U.S. economy. And so the Fed, the central bank in the United States, isn't even looking at interest rates right now because inflation's still high, the economy's chugging along. We in Canada and other countries around the world, right, the ECB, the European Central Bank, central banks around the world are struggling with that question about what happens if inflation rears its ugly head again, and how do we react to that? So yeah, there's a ton of risk happening right now. You know, this idea

that, you know, we're not out of the woods here, right? You know, I did see this graph circulating online that showed that historically for borrowers, the pain has come after the first rate. Yeah, I saw that chart too. It's a really good tweet. So the notion here, this is all sort of we and I think you and I have talked about this before, that the last thing you do is default on your mortgage. Right. But you you'll do all kinds of other stuff as interest rates pile up, as you lose your job or you get your hours cut back and the economy slows and your your family is getting more and more squeezed, right? Canadian households have just been clobbered

over these last four or five years where rising prices have made life more difficult, increased borrowing costs have squeezed them and they've had to make decisions. The decision isn't on mortgage defaults because everybody's trying to do everything, the single thing they can to try to keep their mortgage rolling. But they're, you know, they're not making their car

payments. They're falling behind on their line of credit payments. There's all different kinds of ways that things build up and build up and build up. And now we get relief and that's fantastic. But it's a quarter point. You know, these people that took on a ton of debt at the lowest level, You know, these people that took on a ton of debt at the lowest level, just as the economy slowed and the rates went up and inflation skyrocketed, those people are in for some pain. And a quarter point fix to that isn't going to help them very much or perhaps enough. And so there is always sort of even after you start to cut rates, there's people that just tried and tried and tried to make it and bridge

everything they could, and they just couldn't make it work. Yeah. And I'm sure that there are people who are probably heading towards kind of the end, right, of the runway. You know, you're talking about that relief. Maybe just to put some numbers on it, like I saw somebody talking about how like for every 100K of a mortgage, like let's say you had a variable mortgage right now, you're looking at like a $20 relief here with this 0.25 cut. So, you know, if you have a 500K mortgage, there's like 100 bucks. This isn't. Yeah. So Nisha Patel, my wonderful colleague, did a story about a guy who's in that exact position.

I think he said he's going to save 150 bucks with this quarter point. But that's 150 bucks. And he was just making do before. Now he's got a little bit of cushion. He can go out for dinner. He can buy the extra thing that he wanted. He can buy a present for his kids. It's not a ton, but when you're right at the sort of end of your rope there, that little bit of cushion can make a huge difference. In the Dragon's Den, a simple pitch can lead to a life-changing connection. Watch new episodes of Dragon's Den free on CBC Gem. Brought to you in part by National Angel Capital Organization, empowering Canada's entrepreneurs through

angel investment and industry connections. Hi, it's Ramit Sethi here. You may have seen my money show on Netflix. I've been talking about money for 20 years. I've talked to millions of people and I have some startling numbers to share with you. Did you know that of the people I speak to, 50% of them do not know their own household income? That's not a typo, 50%. That's because money is confusing. In my new book and podcast, Money for Couples, I help you and your partner create a financial vision together. To listen to this podcast, just search for Money for Cups. So I just want to talk a little bit more about the tangible effects that this will have on people's lives. So, you know, obviously, if you have a home equity line of credit, that's going to come down. Car loans are going to come down.

A big one would be if you're like a business owner, now it's cheaper to borrow money. So maybe you buy those trucks that you've wanted to buy. You expand, you hire a few people. Maybe that, you know, adds to like productivity in the economy. And then the other one is obviously mortgages are going to come down. And one sector that has obviously been really sensitive to interest rates is the housing market. And prices have been pretty stalled now for two years in some places. And what's the sense of what could happen to the real estate market now? Now, listen, I'm going to add a very important caveat here, Jamie, that if I knew what was going to happen in the housing market, I'd be sitting on my

private island somewhere and not sitting in a stuffy apartment talking to you about this. But I think there is some consensus that there is a lot of pent up activity, right? Nobody wants to sell their house when there's a downturn. And so there hasn't been a ton of activity. We've seen the activity pick up a little bit through the spring, but not nearly as much as people wanted. Remember, there was some question about whether the Bank of Canada would be willing to cut rates at its last meeting. And part of the expectation or part of the explanation about why they didn't, at least from the economist side, a little bit from the Bank of Canada, was that they didn't want to fuel a spring housing market that they worried might already be overheated. That never really

happened. And that tells you a couple of things. It tells you people still aren't desperate to get out of their homes, which matters in terms of people still able to carry those costs in spite of increased borrowing costs. But it also tells you that a certain amount of seasonal activity that you can expect hasn't happened, and that's probably going to get caught up. And as interest rates fall, and if they continue to fall, I think you can expect to see some of that pick up. So it is definitely something to watch, because either way, it tells us really important things about the state of the economy. If it picks up again and starts to go wild, what's that going to change for the interest

rates going forward? What does that tell us about the underlying state of the economy? If it doesn't, and we don't see a resurgence in the housing market, you know, I'm old enough to remember the housing downturn in the 80s in Toronto, and it took 20 years for that to turn around. So, you know, the prices can get flat unexpectedly, and then kind of have a hard time getting out of it. I think the expectation is that there's some pent up activity that's going to sort of pile back into the market once rates start to come down and buyers are like, okay, now's a decent time. And especially buyers, if you think, you know, if word starts to get around that, okay, we're at the bottom of the market,

you get a ton of people that start to pile right back in. Right. You get that FOMO again. Right. Worth noting, though, is houses still unbelievably expensive and interest rates, even if they do come down five times in the next eight months, it would still be a lot. It'd still be a lot, especially for young people, first-time homebuyers.

Exactly. I was talking to a, and they're the ones who got hit hardest by this period of high interest rates, right? Young people, they're just trying to get into the market and get a piece of what they see their parents and their neighbors and their older colleagues have. They're the ones who just got absolutely clobbered in this. Yeah, it's been great, Peter. I've really been enjoying it. I don't need to tell you any of this for sure.

Let's just do rent for a minute because people have seen their rent skyrocket. Yeah. In part because landlords have been passing on the increased borrowing costs, right? Well, and also because they saw an opportunity, right? Like part of what you measure in the economy is the willingness of consumers to take on extra costs and how high and how far and how much can, whether it's landlords or businesses that are trying to increase their prices, how far can they go before there's a backlash? And I think landlords, a lot of it for sure

has been people simply trying to cover their own borrowing costs. And they've been through the roof and they're passing it on. But some of it is also people just trying to find, they see the market is bearing more weight of higher rents, so they pass on higher rents. The numbers on the rental stuff has been really different, way higher than the month-to-month or year-to-year rates of inflation.

Does anybody think that these rate cuts are going to do anything to the rental market, or is it just like, well, that's what they are now? I think a bit of both, right? Like it's kind of like inflation. If the rate of inflation is coming down, that doesn't mean prices are going down. It just means they're going to grow at a slower rate than they have in the past couple of years. And going forward, we hope prices will rise at, say, 2% rather than 9%. In rent, there's a similar sense. There's a great report.

I think it was from TD Economics a little while ago. It was back like in January or February. And the title of it was something like Canadian rent growth to cool but not collapse moving forward. And I think that's a really good – I've had that title at least, if not the actual body of the report in my head for a while. That I think that's how I have sort of internalized what I think is happening in rentals. We've seen some signs in Toronto and a little bit in Vancouver that there might be room for things to slow a little bit going forward into 2024 and into 2025. The main thing that has to happen on both the ownership of housing and in rental markets is we just got to get more stock

built. And interest rates have done a good job of, you know, have made it harder for businesses that build stuff to get, you know, to cover the cost. And so not as much stuff has been built. There's a bunch of other reasons that have prevented that as well. But hopefully, as rates come down, we'll see more projects getting approved and financing moving forward. Right. You hear a lot about builders who say that they've just been sitting on the sidelines until rates come down. Before we end this conversation, I want to talk to you a little bit more about your interview with Tiff Macklib and this idea of credibility that you talked to him about. Because there is a lot of anger that has been directed at the Bank of Canada over the last few years. And just tell me a little bit more about what led to that anger and how much of it you think is legitimate. Yeah. So I've been thinking a lot about that frustration, that anger, not just with the

policy, but with the institution. We were talking about just earlier about how it was the young people that got really hit hardest by this. I spoke to this great economist named Jim Thorne, who is a very outspoken critic of the Bank of Canada's recent decisions. He thinks they went too high and that they should have cut earlier. And he's like, look, I got to cut these guys some slack. They had a really impossible job to do. That job was made harder by, you know, provinces and the federal government spending pretty solidly through the time they were trying to bring inflation back down. But his quote to me was that the Bank of Canada just hammered the reputation with the younger

generation. They just basically hammered the millennials and all the young families with a variable rate mortgage. It's going to take a long time to put the genie back in the bottle. And so I was thinking a lot about that and that notion going into my conversation with Tiff Macklin. And I wanted to put it to him. Do you worry about central bank sort of communications through this and the ability of that central bank credibility to emerge from this tough period intact? I do. I think it has been a very difficult period for Canadians. We went through an incredibly difficult pandemic. Coming out of it, yeah, we all got really excited, but we had an inflation problem. Inflation went up really sharply. We had to raise rates very forcefully.

That has squeezed Canadians. I think the fact that today we were able to lower our policy rate is a measure that those policies are working. And I was a little surprised at how blunt he was. He said, yeah, I am. And here's why. And he talked about, you know, that you need to have faith that the institution is doing the things that it says it's going to do. Right. Carolyn Rogers, I was talking about earlier, had a great quote when she was talking to, I think it was the Senate Banking Committee, but it was a parliamentary committee in Ottawa this spring. And she said, what's really important to us is that Canadians understand what we're doing, why we're doing it, and that they understand that we're thinking about them and we have their best

interests at heart when we make a decision. And I asked Macklem, do you think Canadians feel that way? Do you think they believe that the central bank has their best interests at heart when you guys make a decision? And he said, we do, but that we've taken a bit of a hit here and that we're going to have to do some work to repair that. I thought that was really honest. I thought it was really a good read of the room, as it were. And I think it's going to be tough, but I think it's a really important task for the bank to do. Is there any acknowledgement, though, that part of the hit was also because of very specific things that he himself has said? So,

you know, you remember back in 2020, it was Macklem who told people, like, if you're thinking about making a major purchase, a house, or if you're a business and you're considering making an investment, go for it. So we have been unusually clear about the future path for interest rates. If you've got a mortgage, or if you're considering to make a major purchase, or you're a business and you're considering making an investment, you can be confident that interest rates will be low for a long time. In 2021, he wrote that op-ed in the National Post, and he said that inflation was transitory.

It was due to all these temporary factors, yeah. Yeah, that it was temporary. And look, there are a lot of people, there are a lot of young people who might not be economists, you know, as their vocation, who bought a house that's a little bit more expensive than they could afford, but they justified it thinking, well, interest rates are at, you know, 0.75% or whatever, I'm going to be able to afford this extra cost. And then they got clobbered as rates went up and went up really fast. So yeah, I think he has, and he and I have talked about those specific missteps and sort of messaging in the past.

And, you know, he also talks about, he talks about how seeing monetary policy start to actually work, where inflation has come down and now interest rates can come down, that all of this hard work and as difficult and painful as it's been has started to pay off. And I spoke to Frances Donald, who I said earlier how I love so much. Me too. And she made a great point about it's really hard to communicate the importance and effectiveness of the way an institution thinks about you and your family as they're actively making things worse, right? As they're making your payments higher and harder and they're taking actions that slow the economy and cool the job market and increase your borrowing costs, it's a lot easier to make those arguments as rates are

coming down and you're making life a little bit easier. So, you know, it's interesting to see how people are kind of framing how hard, but how much easier that job is going to be on the way down than it was on the way up. And just, you know, one final thought, you know, why do you think it's even important that we have like a decent level of trust in this institution in the Bank of Canada anyways, right? Like, is it also maybe a good thing that people have a healthy amount of skepticism about it, considering kind of the trail of problems and, you know, destruction in some ways that has currently been left. Yeah, I think you're onto something here. And, you know, I thought a lot about this in the wake of the 2008 financial crisis, where back then, you know, you remember the central bankers of

those days were like these giants of these institutions that had crystal balls and could see the future. And man, they didn't see the future. And man, those crystal balls were at the very best broken if they ever existed. And I think we've changed how we think and feel and see these kinds of institutions. And I think that's good. I think it's important. good. I think it's important. And I think these central bankers today, whether it's Tiff Macklin or Stephen Poloz before him, or, you know, Jay Powell in the United States, they are, I think, a little bit more humble than they were in the years leading up to the financial crisis through

the 90s and even the 80s. I think it's really important that people not only respect and trust that line that I was talking about from Carolyn Rogers, that they believe that these institutions are working to make their lives better. I think that's really important. I think it's also really important that people understand how these institutions work. And if there's one tiny little fraction of a silver lining on a very dark cloud of these last couple of years, I think it is that people are more engaged. They have followed this story and they have understood it better. And I think they've come to understand the limits of central banking, but I think they've also come to understand the power of it and how, when it works, it can work well and the importance of having targets and all of this.

And I don't want to by any means say that there's good that's come out of how bad this has been. But there are lessons that I think we have all learned, that I have certainly learned about how important these institutions are and how hard a job it is and how really bad it is when it goes wrong. And I think, you know, I think those are good lessons for us all to try to internalize. All right. Peter Armstrong, always a pleasure. Thank you so much. Oh, you bet. Glad to do it. All right. That is all for this week. Front Burner was produced this week by Matt Alma, Allie Janes, Matt Mews, Derek Vanderwyk, and Ben Lopez-Steven. Sound design was by Matt Cameron and Marco Luciano.

Music is by Joseph Shabison. Our senior producer is Elaine Chao. Our executive producer is Nick McCabe-Locos. And I'm Jamie Poisson. Thanks so much for listening, and we'll talk to you next week.