*Updated* Ongoing Bank of Canada Benchmark Rate Announcements

[GGG]

Originally Posted by Nancy

The Fed probably has more room to increase rates without killing mortgagees, with just 10% of mortgages in the US being ARMs and the balance being mostly 25 year mortgages. In Canada, 32.5% of mortgages are variable and the balance are mostly 5 year mortgages... and with CMHC on the hook if they default.

Does CMHC hoard tonnes of cash from years of ever increasing real estate prices or did insurance rates lower to limit profit kind of like EI does? Would CMHC need bailing out with a large housing crash?

[opendoor]

Originally Posted by GGG

Does CMHC hoard tonnes of cash from years of ever increasing real estate prices or did insurance rates lower to limit profit kind of like EI does? Would CMHC need bailing out with a large housing crash?

They used to, but in recent years they've operated similarly to a bank or insurer. They have their capital requirements where they have to keep whatever % of their insured/loaned liabilities on hand as cash, and then they pay most of the rest out to shareholders (the federal government in this case) in the form of dividends.

It's sort of a distinction without a big difference though, as CMHC income/expenses were already incorporated into government finances (so this isn't new money). And similarly, should CMHC have solvency issues, then the government will be bankrolling it.

[Nancy]

https://twitter.com/user/status/1585271004900872196

[Yoho]

Soft pivot after Jagmeet complained about rates. Watch the CAD $ further slide.

[Fuzz]

Originally Posted by Yoho

Soft pivot after Jagmeet complained about rates. Watch the CAD $ further slide.

Ya, that's exactly how it works.

[Slava]

Lol, it’s not because of anything Singh (or Polievre) has said. They front loaded the rate hikes Inflation is easing and they’re signalling a less hawkish tone.

[Firebot]

50 points is lower then consensus. They are feeling pressure from the government?

England and Australia blinked first earlier in the past month, and it looks like Canada is doing the same. I think we are likely to see our CPI inflation target raised in the near future and policies accept that moderate inflation will have to be tolerated (with subsequent consequences)

[Slava]

Originally Posted by Firebot

50 points is lower then consensus. They are feeling pressure from the government?

England and Australia blinked first earlier in the past month, and it looks like Canada is doing the same. I think we are likely to see our CPI inflation target raised in the near future and policies accept that moderate inflation will have to be tolerated (with subsequent consequences)

Well inflation is easing and they are taking a more dovish position. Eventually, they have to pause or push the economy into recession.

[MillerTime GFG]

Colour me surprised. Was definitely expecting 75.

[Izzle]

Is this the soft landing. Economists projecting 75 bips and BoC coming in at 50?

[Leondros]

I think they do 1 more small hike this year and then look at the data going into 2023 with chance we see some 25 bps hikes or a continued hawkish tone threatening hikes. A lot of the BoC's job to adjust sentiment. If you can do that through fear of hikes rather than actual hikes that is deal - ie. change consumer spending habits without needing to do actual hikes at this point.

As for my sense on the recession, it will be inevitable - its likely we are already in one. 2023 is going to be a really tough year for folks.

[Slava]

Originally Posted by Firebot

50 points is lower then consensus. They are feeling pressure from the government?

England and Australia blinked first earlier in the past month, and it looks like Canada is doing the same. I think we are likely to see our CPI inflation target raised in the near future and policies accept that moderate inflation will have to be tolerated (with subsequent consequences)

That's what I was saying a few pages ago, so at least we agree on one thing!

[opendoor]

Originally Posted by Firebot

England and Australia blinked first earlier in the past month, and it looks like Canada is doing the same. I think we are likely to see our CPI inflation target raised in the near future and policies accept that moderate inflation will have to be tolerated (with subsequent consequences)

What a weird comparison. The UK had to engage in emergency Quantitative Easing to overcome disastrous government policy that threatened pension funds' liquidity. Meanwhile Canada raised rates by only 50 points, which still has us with some of the highest rates in the industrialized world (while having among the lowest inflation). Yeah, totally the same thing.

Just to put Canada and the inflation/interest rates into context, here are other major industrialized nations with their inflation rate minus their interest rate (lower number is better in terms of likelihood of handling inflation):

Germany: 8.75 points
UK: 7.85 points
Italy: 7.65 points
Spain: 7.65 points
United States: 4.95 points
Australia: 4.7 points
France: 4.35 points
Singapore: 3.61 points
Canada: 3.15 points
Japan: 3.1 points
South Korea: 3 points
Switzerland: 2.8 points

[DoubleK]

Originally Posted by Leondros

I think they do 1 more small hike this year and then look at the data going into 2023 with chance we see some 25 bps hikes or a continued hawkish tone threatening hikes. A lot of the BoC's job to adjust sentiment.



As for my sense on the recession, it will be inevitable - its likely we are already in one. 2023 is going to be a really tough year for folks.

Nailed it.

[Firebot]

Originally Posted by opendoor

What a weird comparison. The UK had to engage in emergency Quantitative Easing to overcome disastrous government policy that threatened pension funds' liquidity. Meanwhile Canada raised rates by only 50 points, which still has us with some of the highest rates in the industrialized world (while having among the lowest inflation). Yeah, totally the same thing.

Just to put Canada and the inflation/interest rates into context, here are other major industrialized nations with their inflation rate minus their interest rate (lower number is better in terms of likelihood of handling inflation):

Germany: 8.75 points
UK: 7.85 points
Italy: 7.65 points
Spain: 7.65 points
United States: 4.95 points
Australia: 4.7 points
France: 4.35 points
Singapore: 3.61 points
Canada: 3.15 points
Japan: 3.1 points
South Korea: 3 points
Switzerland: 2.8 points

Calculating inflation rate minus interest rate isn't a tangible statistic to measure anything outside of real inflation. It has little correlation.

UK's situation is more dire then Canada's. There are also some very obvious geopolitical reasons for why Europe is seeing higher inflation. The US also has some significant challenges it needs to face.

Both being arguable worse doesn't make Canada's garbage smell any better, and unlike the US, Canada does not have a global currency that investors flock to during a crisis, exasperating our inflation woes. Canada also has the house of cards it built with its RE bubble it has to manage and avoid it fully collapsing and putting Canadians on the streets. Canada's situation is unique to Canada and combating inflation here with interest rates is much more likely to cause a deeper recession then in the US.

if you really want to pull some wild, completely irrelevant context may as well pull Argentina.

https://www.cnbc.com/2022/09/16/arge...vershoots.html

Argentina’s central bank hiked the country’s benchmark interest rate 550 basis points to 75% on Thursday, a day after inflation overshot forecasts to near 80% on an annual basis.

let's see, according to opendoor math and conclusion derived from it, there's only a 5% spread between inflation and interest rates, they are doing great and managing their economy so well! Much better then Germany and on par with the US.

Is that the conclusion you are trying to project here? That Argentina is doing better then Germany and combatting inflation better? Or Argentina cannot be counted because of some narrative on what countries can be used?

What about Brazil? It has interest rates at 13% and inflation at 8.25%, it's running the best economy in the world and handling inflation the best most clearly according to your context.

Lesson: don't try to make conclusions out of a statistic that has no correlation and not accounting the unique economic situation of each country. Raising interest rates too high too quick has severe economic consequences, likewise not combating inflation (as the BoC failed to do until it was too late for any soft landing approach) could cause it to spiral out of control.

Canada raising interest rates to 10% and killing inflation but killing the economy in the process, doesn't make them 'win' some type of race. And that is why they will likely raise their CPI inflation target despite just a year ago still stubbornly calling inflation transitory.

[powderjunkie]

Originally Posted by Firebot

Calculating inflation rate minus interest rate isn't a tangible statistic to measure anything outside of real inflation. It has little correlation.

UK's situation is more dire then Canada's. There are also some very obvious geopolitical reasons for why Europe is seeing higher inflation. The US also has some significant challenges it needs to face.

Both being arguable worse doesn't make Canada's garbage smell any better, and unlike the US, Canada does not have a global currency that investors flock to during a crisis, exasperating our inflation woes. Canada also has the house of cards it built with its RE bubble it has to manage and avoid it fully collapsing and putting Canadians on the streets. Canada's situation is unique to Canada and combating inflation here with interest rates is much more likely to cause a deeper recession then in the US.

if you really want to pull some wild, completely irrelevant context may as well pull Argentina.

https://www.cnbc.com/2022/09/16/arge...vershoots.html



let's see, according to opendoor math and conclusion derived from it, there's only a 5% spread between inflation and interest rates, they are doing great and managing their economy so well! Much better then Germany and on par with the US.

Is that the conclusion you are trying to project here? That Argentina is doing better then Germany and combatting inflation better? Or Argentina cannot be counted because of some narrative on what countries can be used?

What about Brazil? It has interest rates at 13% and inflation at 8.25%, it's running the best economy in the world and handling inflation the best most clearly according to your context.

Lesson: don't try to make conclusions out of a statistic that has no correlation and not accounting the unique economic situation of each country. Raising interest rates too high too quick has severe economic consequences, likewise not combating inflation (as the BoC failed to do until it was too late for any soft landing approach) could cause it to spiral out of control.

Canada raising interest rates to 10% and killing inflation but killing the economy in the process, doesn't make them 'win' some type of race. And that is why they will likely raise their CPI inflation target despite just a year ago still stubbornly calling inflation transitory.

Oh man you're such an insufferable blowhard.

Opendoor contributed to the discussion with an interesting metric comparing reasonably similar countries. He made no definitive statements or conclusions.

But congratulations, you found some extreme outliers. Filip Gustavsson has a higher Pts/60 than several skaters in the league this season - obviously it's ridiculous to suggest that he's a more productive offensive player, so we should probably just toss Pts/60 in the trash bin.

[Monahammer]

Fingers crossed that this is a signal that we're almost at the peak of the rate increase march.

[opendoor]

Originally Posted by Firebot

Calculating inflation rate minus interest rate isn't a tangible statistic to measure anything outside of real inflation. It has little correlation.

Economists worldwide will be interested to learn that real interest rates don't matter in influencing future inflation.

UK's situation is more dire then Canada's. There are also some very obvious geopolitical reasons for why Europe is seeing higher inflation. The US also has some significant challenges it needs to face.

Both being arguable worse doesn't make Canada's garbage smell any better, and unlike the US, Canada does not have a global currency that investors flock to during a crisis, exasperating our inflation woes. Canada also has the house of cards it built with its RE bubble it has to manage and avoid it fully collapsing and putting Canadians on the streets. Canada's situation is unique to Canada and combating inflation here with interest rates is much more likely to cause a deeper recession then in the US.

All that means is that Canada doesn't have to raise rates as high as other countries to achieve the same reduction in liquidity. I mean, you can't have it both ways. You're simultaneously accusing the Bank of Canada of caving to political pressure and shirking their responsibility by not raising rates by 75 points, while also saying that Canadians will be living on the streets as rates go up. Those two positions aren't logically consistent. If interest rate increases have an outsized and catastrophic effect on Canada's economy (which is far from a given), then they simply don't need to rise as high to have their intended effect when compared to other countries.

Diverging from the US will tend to hurt the Canadian dollar, so it will impact things to some degree, but that's been the reality for our country's entire existence. And the US also won't need to raise rates all that high either because like Canada, they have cheap domestically produced energy which is what's really driving runaway inflation in Europe.

if you really want to pull some wild, completely irrelevant context may as well pull Argentina.

https://www.cnbc.com/2022/09/16/arge...vershoots.html

let's see, according to opendoor math and conclusion derived from it, there's only a 5% spread between inflation and interest rates, they are doing great and managing their economy so well! Much better then Germany and on par with the US.

Is that the conclusion you are trying to project here? That Argentina is doing better then Germany and combatting inflation better? Or Argentina cannot be counted because of some narrative on what countries can be used?

What about Brazil? It has interest rates at 13% and inflation at 8.25%, it's running the best economy in the world and handling inflation the best most clearly according to your context.

Argentina and their near decade-long period of hyperinflation is basically irrelevant to countries not experiencing that. But even then, they've had -20 to -30% real interest rates for most of the year which are extremely inflationary.

As for Brazil, their inflation has dropped considerably in recent months and they're currently seeing deflation. That's in large part due to them having a period of positive real interest rates. That says nothing about the rest of their economy, just that positive real interest rates will tend to reduce inflation (though obviously not always). And being closer to positive real interest rates (like Canada is) will tend to reduce inflation more than being in deeply negative real interest rates (like most of Europe is), though again, not always.

Lesson: don't try to make conclusions out of a statistic that has no correlation and not accounting the unique economic situation of each country. Raising interest rates too high too quick has severe economic consequences, likewise not combating inflation (as the BoC failed to do until it was too late for any soft landing approach) could cause it to spiral out of control.

Canada raising interest rates to 10% and killing inflation but killing the economy in the process, doesn't make them 'win' some type of race. And that is why they will likely raise their CPI inflation target despite just a year ago still stubbornly calling inflation transitory.

All I'm talking about is inflation. Economies with higher real interest rates will tend to see inflation drop faster than economies with lower rates. That's basic economics. And as that list shows, despite Canada's rate increase being below what a bunch of analysts thought, we still have among the highest real interest rates in the industrialized world.

You've created a fictional counterfactual in your head where raising rates by 25 points a few months sooner would have had a significant effect on long term inflation rates. There is simply no logical basis for that. Outside of 2 countries who've experienced significant deflation risks over the last couple of decades (Japan and Switzerland), no industrialized nations have avoided high inflation post-COVID.

[blankall]

Originally Posted by opendoor

All that means is that Canada doesn't have to raise rates as high as other countries to achieve the same reduction in liquidity. I mean, you can't have it both ways. You're simultaneously accusing the Bank of Canada of caving to political pressure and shirking their responsibility by not raising rates by 75 points, while also saying that Canadians will be living on the streets as rates go up. Those two positions aren't logically consistent. If interest rate increases have an outsized and catastrophic effect on Canada's economy (which is far from a given), then they simply don't need to rise as high to have their intended effect when compared to other countries.

This analysis isn't taking into consideration the massively growing wealth gap in Canada. If you own a property and a house, you are likely in great shape. If you don't or have a massive mortgage, you could end up on the streets.

[Firebot]

Originally Posted by opendoor

You've created a fictional counterfactual in your head where raising rates by 25 points a few months sooner would have had a significant effect on long term inflation rates. There is simply no logical basis for that. Outside of 2 countries who've experienced significant deflation risks over the last couple of decades (Japan and Switzerland), no industrialized nations have avoided high inflation post-COVID.

I can't respond to each point and each post each time, but I will respond to this one.

Raising interest rates earlier would have most certainly softened the blow. Again we are talking about softening, and that means the economy would have still suffered as a result and Canadians would have still seen inflation and . Surely you see a difference between slowly raising the same 3% interest rate increase over 2 years versus 6 months, especially when those low interest rates for longer then necessary exacerbated a rush for more credit at historically low rates unlike anything Canada has seen? That is simple economics.

If you institutionalize inflation people simply accept the increases, and it is much harder to control it once it has let loose. The BoC failed to act on the warnings signs last year.

As a result of prolonged inaction, the BoC was caught with its pants down once new geopolitical factors arose (i.e the Ukraine invasion), and decided to hit the runaway inflation problem with a sledgehammer as it really had no other choice at that point. Doing such an attack has dire consequences to the economy and forces a recession, how severe of a recession and economic crisis is still unknown.

And again, just because the UK has decided it would rather spiral its economy out of control doesn't mean Canada should as well.

The BoC did not create the global conditions in supply chain and most certainly had no role in what is happening in Europe, but it most certainly did amplify inflation locally by stubbornly not acting and keeping the flows of cheap credit open until it was too late, and created a much more dire housing situation on the promise of cheap credit and 'low interest rates for a long time'

That you are continuing to defend their action and pointing to whataboutism by looking at inflation / interest rates else doesn't absolve the BoC and the Canadian situation it created. The BoC messed up the obvious warning signs last year. And now they are in a spot where they have to slow down on the rate hikes even though inflation is still running hot. Is today's action correct or wrong? Too early to say, as both actions have separate side effects and consequences. Will a quarter point difference today make or break the Canadian economy? Most unlikely. Maybe all the interest rate hikes were enough in bringing inflation down, but maybe they are not. Either way, Canadians will pay a price.

But these are the difficult decisions that have to be made today because of inaction last year that made today's problem worse than it needed to be.