The Current - What does another interest rate cut mean for Canadians?

Episode Date: December 12, 2024

The Bank of Canada cut its interest rate again yesterday — now down to 3.25 per cent. An economist lays out what that means for your debt, our dollar and an economy that’s got Canadians feeling stretched.

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On Drugs is available now wherever you get your podcasts. This is a CBC Podcast. Hello, I'm Matt Galloway and this is The Current Podcast. It was a move widely expected by economists as Canada grapples with a rising unemployment rate and falling GDP. Today we lowered the policy interest rate by 50 basis points. This is our fifth consecutive decrease since June and brings our policy rate to 3.25%. Monetary policy has worked to bring inflation back to the 2% target.

Our policy focus is now keeping inflation close to target. That's Bank of Canada Governor Tiff Macklem announcing yesterday another big drop to the key interest rate, which as you heard, now sits at 3.25%. It was the second consecutive slash of 50 basis points and, as you heard as well, the fifth rate cut in a row. Tiff Macklem also cautioned that even though the Bank of Canada is considering further cuts, we should not expect them to continue at such a rapid pace. Frances Donald is Senior Vice President and Chief Economist at RBC. She's in Montreal. Frances, good morning.

Good morning. We knew a rate cut was coming. There were questions as to the size of that cut and what it would be. Do you think this was the right move by the bank? Well, not our job to say whether it was the right move or not, but it's certainly consistent with an economy that is still struggling, Matt. This is an economy where the unemployment rate is still rising and likely going to continue to. Inflationary pressures are lower in year-over-year terms, of course, not in level terms. And there are signs of weakness that persist in most regions and for most groups. That would mean, well, look, this economy could

probably use a little bit of support and maybe a lot of support. And the Bank of Canada cutting 50 basis points and telling us there's more on the horizon looks pretty consistent with an economy that could use a little extra right now. Could use a little extra. Is it on the edge of a recession? Are we in a recession right now? Well, technically, no. Recession is usually defined as two quarters of negative GDP. For most Canadians, that really doesn't matter. A recession feels more like, can you afford to pay your weekly bills and do you have a job? And for a lot of Canadians, especially if they are lower income or middle income, it very much feels like a recession. And that's in the data. We know wage growth has been much lower for lower and middle income

Canadians. A lot of Canadians are not benefiting to the same extent as higher income Canadians from really high stock prices, for example. And if you've been if you're a renter, prices are substantially higher than they were four years ago, about 25 percent higher than four years ago. If you spend more of your income on food, for example, then things might very much feel like a recession. And there's some disagreement. then things might very much feel like a recession. And there's some disagreement. I mean, even the prior governor of the Bank of Canada, Stephen Poloz, said Canada is in a recession by many non-traditional metrics.

So I might suggest moving away from this idea that there's a binary yes or no recession and acknowledging that there are pockets of Canada that are very much, even by the traditional Excel spreadsheet definition, in recession. But the total economy does not technically check that box right now. This is the fifth rate cut, as I said, since June, and the last two were sizable. Are we starting to see, and it takes a while for the sense of those rate cuts to be felt, but are we starting to see, and is the economy starting to see the impact of those rate cuts to be felt. But are we starting to see, and is the economy starting

to see the impact of those previous cuts? Not quite yet. In fact, most of the data is still rather disappointing. Now, that's not a huge surprise because generally we expect those lower interest rates to start showing up in traditional data about a year to two years after they come down. And that might be why the Bank of Canada continues to feel confident in cutting by 50 basis points and signaling that there will be more ahead. Of course, folks who have variable rate mortgages will feel that instantaneously. If you have a fixed rate mortgage, then you're susceptible or you're exposed to a different type of rate. That's the rate that's determined by global bond markets. And global bond markets have already incorporated into their outlook significant rate cuts from the

Bank of Canada. So actually, if you're exposed to that part of the interest rate area of the world, you're not likely to see more relief. That relief has already been embedded. Generally, we think we're going to see in the second half of 2025, more evidence of that easing flowing through into the broader data. Can I ask you about mortgages? I mean, there's what people have called a mortgage renewal cliff that more than a million Canadian mortgages are up for renewal in 2025. And the concern from a lot of people was maybe people had locked in at a rate that was much, much lower than the one that they are going to renew at, and that could create some economic turbulence is probably a mild word. Has that been ameliorated at all by these rate cuts? a concern. It's factual. We know that there are a fair share of Canadians who will renew at slightly higher or in some cases, particularly higher interest rates. But from the RBC standpoint, we're generally watching for two reasons why folks struggle to pay their mortgages.

One would be that the cost of that mortgage rises. But typically, Canadians actually, they're pretty good at paying their mortgage. They're more likely to pull down on spending in other areas. So when I think about the mortgage renewal cliff, I don't worry as much that Canadians won't be able to pay their mortgage, but I worry about what sacrifices they'll have to make in order to do that. discretionary spending like clothing or other activities or even driving are not to me as a just a general Canadian things that are optional. They are things that we have to do. It's not a choice whether to buy a snowsuit for your kid or not, but that type of spending tends to get squeezed. Where I'm a little bit more concerned is not the, oh, your mortgage payment rose and therefore you can't afford it. There's another reason why people struggle to pay their mortgage. And it's if they don't have a job anymore, they've lost a source of income and we are seeing the unemployment rate rise. So our analysis says not to be so nervous specifically about the mortgage renewal

cliff because folks won't be able to make those payments, but actually that we should be watching whether folks have jobs and whether they're capable of paying their mortgage, even if they're making sacrifices in other areas. I got to tell you, Matt, none of these situations that we're describing are positive for the economy. So when you asked me earlier, did the Bank of Canada do the right thing cutting 50 basis points? It's hard not to feel that that type of relief is going to be very necessary for a lot of Canadians, and they're going to need more on the horizon. Can I ask you just one more thing about the housing market?

One of the things that we've talked about, and this is with developers and builders, is that they had slowed down perhaps some construction because of high interest rates, that it was complicating their math in terms of what they thought they might get out of those developments. Do you think that a rate cut will have any measurable impact on the housing market and the housing crisis that we see across this country? It's such a great question because one of the pushbacks against rate cuts has been, well, you're going to inflame the housing market, you know, where you're going to make house prices go higher and there's already an affordability crisis with housing as long as a whole other range. But actually this housing market is being

much more constrained by the lack of houses than that credit is too cheap or that, you know, folks are buying up too many houses. It's that we just don't have enough of them. So the way that interest rates play into the housing market has changed very much in the last four years, especially with the surge in population growth. And when we see interest rates fall, we see investment of all types accelerate from housing to research and development, because small businesses and big businesses are not very much unlike households and like they need to make decisions about where they're going to put their money. And if money is easier to access and cheaper, they're more likely to borrow more of it and invest more. So absolutely, I'd agree that if we can have some lower interest rates and it helps spur supply,

that will help with the margin. I got to tell you though, Matt, there is a significant amount of shortage of homes. This is not going to be something that moves the dial in the next one to three years. We're really trying to get a sense of how much supply we can build in the next five to 10 to try to rectify that imbalance. How worried should we be about rate cuts on the Canadian dollar? And this is not just for people who are lucky enough to be able to travel somewhere else. I mean, in terms of what we bring into this country, there could be an impact on a lower dollar on any number of parts of the economy. And so if you continue to cut rates, is that going to drive the dollar even lower? Well, I'll give you a little bit of good news.

And that is that the Canadian dollar is actually global market participants who trade the Canadian dollar and ultimately determine its value. They don't just look at what happened this month. It's not that the Bank of Canada cuts interest rates and therefore the Canadian dollar falls. It's based on expectations as to where those interest rates and other elements of the economy will be over the next two to five years. And the Canadian dollar, and we can look at this mechanically, has already incorporated a significant easing cycle from the Bank of Canada. That's why the Canadian dollar has done so poorly up until now or has weakened so significantly. So we actually, even though we anticipate the Bank of Canada will continue to cut, don't see a lot more weakness in the Canadian dollar ahead because it's already in the price. But I think maybe the greater consideration is that 10 years ago,

we operated in a range where the Canadian dollar was stronger. So in U.S. dollar terms, you know, around 120 to 130, it fluctuated around there. What we may have to recognize is that the Canadian dollar in an environment where Canada is doing much worse economically than the United States is probably going to stay around these levels, stay at this level of weakness. So there isn't a lot of opportunity for us to, for example, hope that we can book a trip somewhere down south in the U.S. two years from now, and that we'll be in much better shape. I think that's the bigger story here is that we're probably stuck at these levels or around them more than some expectation of material weakness ahead. I have to let you go,

but just very briefly, given what you've said about the state of the economy, the governor says that there will be further rate cuts, but they perhaps will not be as aggressive as what we're seeing right now. How low do you think rates may go? I don't know whether you do those sorts of predictions, but how low do you think we might have to get given the state of the economy now? Oh, that's our bread and butter is figuring out where the Bank of Canada will go. Our RBC forecast is that the Bank of Canada cuts rates down to 2%. They do it with 25 basis points every quarter on a go-forward basis for the next year or so. It could be 225, it could be 175, but the key is the direction. And the direction is we have

more rate cuts ahead, just probably not 50 basis points and probably not at every meeting. I'm glad I asked. Frances, it's great to talk to you as always. Thank you very much. Thanks for having me. Frances Donald is the Senior Vice President and Chief Economist at RBC.