The Current - What will the Bank of Canada’s rate cut mean for you?

Episode Date: October 23, 2024

The Bank of Canada has slashed its key interest rate to 3.75 per cent, the biggest drop since the start of the pandemic. We look at how long it will take for this to reach the wallets of cash-strapped Canadians — and the tightrope the Bank is walking when it comes to inflation.

In 2017, it felt like drugs were everywhere in the news, so I started a podcast called On Drugs. We covered a lot of ground over two seasons, but there are still so many more stories to tell. I'm Jeff Turner, and I'm back with Season 3 of On Drugs. And this time, it's going to get personal. I don't know who Sober Jeff is. I don't even know if I like that guy.

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. As expected, it was a big one. This morning, the Bank of Canada announced a major cut in interest rates down by 50 basis points. The bank's been consistently cutting its key overnight lending rate since June. This was their fourth straight cut in almost as many months. But today's change was much more substantial.

To talk about what it could mean for the sluggish economy and for ordinary Canadians, I'm joined by Frances Donald, who's the chief economist at RBC. Frances, good morning. Good morning, thanks for having me. Great to have you. Bank of Canada Governor Tiff Macklem has just started speaking in Ottawa. One line that he said in his opening statement really jumped out at me. Let's take a quick listen here. If the economy evolves broadly in line with this forecast, we anticipate cutting our policy rate further to support demand and keep inflation on target. 50 basis points was, it sounds like, just the start. What does that tell you about the future

path ahead for rate cuts? Well, Peter, I think you've pulled the most important line, which is this is not the end. This is much closer to the beginning. This is a central bank that is telling us the economy just still isn't where it needs to go to do what Tiff Macklem says, stick the landing of this deceleration. And interestingly, even though the Bank of Canada knows it cuts interest rate a lot and it expects to cut them more, it still hasn't revised its outlook for inflation or growth. And that tells us it notes that this economy still needs more support from rates. So another 50 basis points in December is a reasonable call. And we're likely to see interest rates fall to at least 3% and potentially even as low as 2% over 2025. And just walk us through that, because we've spent much of the

last two years almost uniquely focused on inflation. But now, as you say, we're starting to look at GDP. It's sluggish. It's been negative in per capita basis in seven of the last eight quarters. The unemployment rate continues to tick up. To what extent are we kind of in a race here to get rates as low as we can in order to try to stave off a recession? Well, race is a good way to put it. And in part, the central bank probably is worried about what they would call downside risks or potential problems ahead. And we're seeing a little bit the whites of the eyes of that. Job openings have continued to decline. There's now two unemployed people for every job opening. Businesses have expressed in surveys that they're still concerned about the outlook.

The unemployment rate has been rising steadily for just about two years now. And that's enough for the banks, Canada, to feel as though we've tamed inflation in year-over-year terms. We got to get on with it. And that's where those jumbo cuts are probably coming in. This was the first of them. You'll probably hear commentary that there's more to come, but it is a little bit of a race. And just a reminder, the economy is still absorbing the higher rates. It takes almost two years for rate moves from the Bank of Canada to work their way through the system. So even though we're in an easing cycle, we're balancing the prior impacts of higher rates with these new rate cuts. And that's hard for an economy to digest. It creates bumps along the road. You know, this slowing was done by demand. The idea was that if you raise rates, it'll slow the economy, that'll get inflation back

under control. And if we pull off the perfect move, we can do that without slipping into a recession. Now it seems like that recession risk is suddenly underfoot and very real. Does it tell us that maybe the Bank of Canada went too far or did it leave rates too high for too long? Or was all of this just kind of the inevitable cost of bringing down inflation? Well, I think we should give central banks a little bit of grace on this one. We went through one of the largest inflation or price shocks of our generation, some of us in our entire lives. And understanding what drove prices higher hasn't been cut and dry for any economists or central banks.

A lot of folks have pointed to how much of the inflation was globally driven. Port strikes, supply chains being misaligned, shortages from COVID. That wasn't really the Bank of Canada's responsibility to solve. But underlying the surface, we've also seen a ton of government spending, which has increased prices. We've seen huge flows of immigration. And so the Bank of Canada has had to apply its judgment as to how much of this was on them to fix and how much of it was global. But a reminder that central banks all over the world

are cutting interest rates, including in the United States and Europe. So the time has come now to think more about the downside risks than the upside risks for prices. We've had this steady stream of cuts since June, and that hasn't moved the needle. In today's opening statement, Tiff Macklin said that today's interest rate decision should, in his words, contribute to a pickup in demand. Even if you factor in however much we're at like 1.25% in rate relief just in the last few six months or so, if that hasn't moved the needle a few hundred bucks a month into people's pockets, what will? Well, it takes a lot longer. So most folks won't see that right away. They have to renew their mortgages, see those lower rates come through. It's really variable rate mortgage holders that'll feel that. That's a really small part of the population. So there's two things at play. One is rates are still higher than they were two years

ago, but also there's just not enough rate cuts in the system. And that's what gives economists faith that there's going to be more rate cuts ahead. It's not that rate cuts don't work, it's that they've been too small, too little, and some may say too late so far. And this is why the Bank of Canada is indicating as long as inflation continues to stay below that 2%, even if it's bumpy, there will be more rate cuts ahead. There's another line in here that I just want to run by you. Macklem says, in Canada, the economy grew at around 2% the first half of the year. We expect growth of 1.75% in the second half. Consumption has continued to grow but is declining on a per person basis.

That tells me that the bank believes we will avoid a recession. Does that match with what your forecasts are telling you? Well, when I hear you say those words, I think even as an economist, that's a lot of technical jargon. What does it even really mean? So a reminder that a technical recession is two quarters of negative gross domestic product, which is a way that economists try to measure the health of an economy. But it hasn't worked in Canada because we've been adding so many folks to the economy that the pie has been getting bigger,

but everyone's share of that pie has actually been getting smaller. What's really fascinating to me in this report this morning as I scan it is the bank of canada is focusing a lot more on what they call per person elements of growth per person consumption and focusing on how the health of the individual is really struggling versus the health of the aggregate economy that's really good news for canadians and i think it speaks to their understanding that actually even if some of this headline data looks good on the surface, there are challenges underneath that's going to be supportive of more rate cuts ahead. All right. Smart stuff as always, Frances. Appreciate you. Thank you so much, Peter. Frances Donald, Chief Economist at RBC. Ron Butler has been listening in on all of this. He's a mortgage broker, the founder of Butler Mortgage,

and the host of the Angry Mortgage podcast. Ron, good morning. Morning. How happy should people with a variable rate mortgage be this morning? They are happy. They are unreservedly happy. It is great news for all of them. Same for people who hold home equity lines of credit,

who have balances on those instruments. It's great news. But Francis is eminently correct. The news on the economy is not good. The Bank of Canada governor assuring everyone that he will keep reducing the Bank of Canada rate is out of necessity. There's going to be a brisk trip down to 2.5, in my opinion. So we've had whatever it is now, 0.75% leading into today and now 50 basis points today. So one and a quarter percent rate relief just in the last five or six months. The Canadian Mortgage and Housing Corporation has these average monthly mortgage payments. In Ontario, it was $2,700. In BC, it was $2,900. In BC, it was $2,900.

If you've got a mortgage, the average mortgage in Canada, around whatever it is, $650,000, this is probably like close to $200 in your pocket, right? A 50 basis point change? Probably closer to $150. That said, as Francis alluded, it's not everybody who has a very great mortgage.

For sure. But it's great news, great news for people who can expect a renewal. And we have millions of Canadians expecting renewals over the next two years because it's clearly a path for lower rates than the 4%, 5%, and 6% rates that they were seeing just a year ago. So yeah, it's going to be better for everybody. But it's also true that most of those people had a rate of about 2.29. So no matter how you slice it, it's still going up. It's still going up.

Yeah, exactly. Now, the Bank of Canada, when it was pausing rates six, seven months ago, was saying, we don't want to start bringing down rates too quickly. And a part of that was telegraphed to be a concern that if they started bringing down rates, they'd refuel Canada's notoriously bonkers housing market. That didn't happen.

Does a 50 basis point cut change that? Do we see a reacceleration in housing prices in Canada as a result of this? Well, we've experienced in some provinces decade lows in the sales volume. And certainly in British Columbia and Ontario, prices are not going up, even if sales activity has increased slightly. So I think the Bank of Canada governor, who's got access to tons of information and up-to-date minute-to-minute information from the Canadian commercial banks, I think he's got a pretty good idea that the housing market is

in a bit of a slump and it's not going to go gangbusters anytime soon. I can wrap my head around what this means for sort of residential, you know, people buying and selling their primary residences. What does this mean though for new housing? Are there going to be investors going back in and trying to invest in pre-construction condos again? Where are we on that? And how important is that piece of all of this? Well, it's incredibly important because these are like 100, 200, 300, 400 units at a crack.

In Ontario, they make up 80% of all new housing is a high rise, which is ground to a complete halt. There's no new projects going up, ridiculously low compared with past years. So it's a grave concern, because ultimately it means much less supply in four years. And will this help? It won't hurt, but it's not the answer. There are so many structural problems in terms of just how much development fees and taxes and permit delays and additional studies and red tape that municipalities and provinces have brought into the fray that it's not going to start getting better anytime soon. And that's sort of the concern, right?

That you combine all of this, interest rates come down, that should, even if it's just by a little bit, drive up activity and put a floor at least under some home sales figures. At the same time, as you say, we're not going to see as much new construction. Where are we on affordability and what needs to happen to get, you know, all these people that have been priced out and what needs to happen to get you know all these people that have been priced out and we're hoping they could get back in it's not looking so good right now it's not looking good the only small ray of sunshine is for renters in ontario and

british columbia um average new rents are have come off and in some cases in uh like toronto they've come off about eight percent so you know not everybody's going to own a home. So it's good news that really outrageous rents are coming down a bit. But for people who want to own a home, they are probably going to need substantial price reductions even with these somewhat lower interest rates. And we will run into this supply side mess sometime in the next, by the end of three or four years. So what is the scenario then that could possibly bring down substantially housing prices in Canada?

Is it just simply we need to build more stock, which as you've now pointed out, we ain't doing? So the possible answer is, and it's a very sad answer, is a real hard landing, a true recession, a real economic contraction that it will just drive house prices down because there's not a whole heck of a lot of people who are interested in making a major purchase when their brother-in-law or sister-in-law has just been laid off their job. I mean, there is an element of grave concern that comes into people's lives. And that kind of a real drop off in sentiment, that leads to lower prices eventually. I lived through it in 1991. Right. A lot of us did. Ron, we're going to leave it there, but thanks for this. Really appreciate it.

Thank you. Ron Butler is a mortgage broker who services the greater Toronto area, Ottawa, Vancouver, and Calgary. He's also the founder of Butler Mortgage and the host of the Angry Mortgage Podcast. In 2017, it felt like drugs were everywhere in the news. So I started a podcast called On Drugs. We covered a lot of ground over two seasons, but there are still so many more stories to tell. seasons, but there are still so many more stories to tell. I'm Jeff Turner, and I'm back with season three of On Drugs. And this time, it's going to get personal. I don't know who Sober Jeff is. I don't even know if I like that guy. On Drugs is available now wherever you get your podcasts. Okay, so we talked to Francis about sort of the macroeconomic, where are we now?

Ron filled us in on the housing side of this. The last part we want to talk about is business sentiment, business investment. Where does that stand? Robert Asselin is the Senior Vice President of Policy at the Business Council of Canada. We've reached him in Ottawa. Robert, good morning. Good morning, Peter. What's your reaction to the scale of this cut?

Good morning, Peter. What's your reaction to the scale of this cut? I think this shows that the bank sees the economy as being weak, that we need to accelerate cuts. I think given the reliance on housing consumption in our economy, they were also very sensitive that that was a big factor in their decision uh but i think the most important thing for me peter is that for people who are ip who are happy today and they should because they're going to pay less in interest rates uh monetary monetary policy is not a substitute for pro-growth policy it's not an engine of growth per se. And I'll remember everyone that from 2008 up in 2020, we had very low interest rates and still a sluggish economy. So I think people have to check their expectation on what today means going forward. There's a lot of weakness in this

economy, it seems to me. for sure and because it's such an important nuance that i think does get sometimes lost in this conversation but you can draw a straight line like if people have that extra uh you know what did ron say 150 bucks in their pockets because the interest rates have gone down that ideally means they're going to go out and spend it but if they're not confident that the economy is going to get better they might stash it under their mattress and say, well, I don't know, it was a rainy day coming up ahead. What to, how do business owners sort of gauge

that and get a sense of where demand is going to be? I know there's an enormously complex sort of wing of the, of the industry, but, but it's such a difficult thing to get a read on, isn't it? I agree. And a lot of Canadians have, have did, I've

been doing this saving for rainier days. You know, there's this sense that the economy is shaky, that price levels are very high, even though inflation is decelerating. And there's this important notion between price not rising as fast and price levels still being very high. And that won't come down. And so people are, I think, saving more. That affects businesses. People, of course, are conscious that consumers are wary. They're still paying much more than they did a few years ago on food prices and stuff like

that. And so at the end, I think it comes back to our growth model. Our growth model right now in Canada is population growth and consumption. And if these two things are not going to yield to more productivity, which at the end, this is efficiency is what drives economic growth.

I think there's more worry to be had going forward, Peter. No, for sure. And again, I'm just sort of scanning through what the Bank of Canada has said, what Governor Tiff Macklem has been saying in his opening statement. And one of the lines is that business investment

is expected to strengthen as demand picks up and exports should remain strong, supported by robust demand in the United States. That sounds very easy and cut and dry. Is that what businesses are seeing and expecting on the ground? I think you have to distinguish also in the scale of businesses. In Canada, we're relying a lot on SMEs versus large firms because... SMEs being small and medium-sized enterprises.

Exactly. And the ratio is disproportionate compared vis-a-vis the US, for example, where you have much larger firms. Larger firms have more financial capacity. They can invest more in R&D, in long-term investments. And this is why scaling our small-medium enterprise is so important as a matter of policy. And so I'm worried that because we have a disproportionate amount of SMEs in our economy, and SMEs are not a bad thing, but they are restrained from investing in the future and skilled workforce, innovation, R&D, all this stuff that larger firms can do more easily. So I do think that's a structural weakness in our economy. You know, we've talked to you and I about this before, that when monetary policy was

trying to be used to bring down inflation, we were supposed to not have as much fiscal stimulus, fiscal policy from government spending. That didn't really work out. But do you think governments across the land might feel a freer hand now that inflation is back on target to get back into investing in business policy? Yeah, I'm actually worried about that. I think fiscal policy has always been stimulative since the pandemic, both at the provincial, federal level. It has not been helpful for the Bank of Canada, I think. And now the reflex will be to spend more,

I think, especially at the federal level. We're coming to an election. I think the current government have shown over the last nine years, this is what they like to do. The problem is these investments have not raised what I call our productive capacity,

our ability to be more efficient, more innovative and grow the earnings we earn for each hour that we work. And so if we spend more on consumption, sending check to people, checks to people, the latest example being Doug Ford,

wanting to send in checks to everyone before an election, I think this will be really harmful. This is not a way to grow the economy. And we must, uh, not be complacent about this fiscal policy will only work if it, uh, enhance our productive capacity as a country. Indeed. We're going to have to leave it there. Robert, thankent about this. Fiscal policy will only work if it enhances our productive capacity as a country.

Indeed. We're going to have to leave it there. Robert, thank you for this. Always appreciate your insight. Thank you. Robert Aslan is the Senior Vice President of Policy at the Business Council of Canada. He's a former policy advisor to Prime Ministers Justin Trudeau and to Paul Martin. For more CBC Podcasts, go to cbc.ca slash podcasts.