October 25th, 2022 | Market Watch

ANOTHER SCARY ANNOUNCEMENT BY THE BoC … JUST IN TIME FOR HALLOWEEN!

BANK OF CANADA SET TO DELIVER ANOTHER JUMBO RATE HIKE TOMORROW – OCT 26

Hey guys!  Ahead of tomorrow’s BoC rate announcement, here’s a quick summary of what you might expect and why … in point form.  Hope it provides some clarity … we’d love to hear your thoughts and are always happy to discuss what any/all of this actually boils down to for YOU (i.e. how does this all impact your plans to BUY/SELL in actual dollars and cents).

Here’s the scoop:

• Last week, Stats Canada released its updated inflation rate
• While economists forecasted 6.7% for September
• The actual rate came in at 6.9%
• With the average core inflation rate remaining unchanged (matching August) at 5.3%
• ASIDE:  Core inflation strips out volatile items like food and gasoline
• So, where does that leave us?
• Well, if we exclude food and energy, prices rose 5.4% yr/yr in September, following a gain of 5.3% in August

BOTTOM LINE:  Inflation is still TOO HIGH and prices are still rising – i.e. not good

Therefore, it’s all but guaranteed we’ll see a 0.5 to 0.75 bps hike tomorrow, Oct 26

Why?  Well, because per Tiff Macklem, “…inflation expectations could become unmoored (i.e. not realistic) … and high inflation could become self-fulfilling … we can’t let that happen.”

What he’s saying here is based on a BoC survey of consumer expectations around inflation, which showed that Canadians believe that inflation will still be around:

• ~7.11% in 1 year
• ~5.22% in 2 years
• ~3.44% in 5 years

And this is SERIOUS PROBLEM… because:

• If YOU think goods/services are going to cost more tomorrow vs today – YOU WILL SPEND TODAY
• Pushing inflation higher (i.e. self-fulfilling)

According to various sources and projections – the BoC policy rate will likely increase to 4-4.5% by Q1/Q2 2023. And could they go higher?

Sure!  Why not?!  Think about it – the purpose of these hikes is to get inflation under control – so until this happens, they’ll continue to raise rates.

But when will they (BoC) stop raisin rates?

Well, in our opinion, not for the foreseeable three quarters – here’s why:

• When the PRIME RATE < INFLATION RATE … it encourages spending
• And so, PRIME needs to equal INFLATION first, if not exceed it … to discourage spending … to discourage inflation
• At that point, the BoC will look to see if there’s some stagnation or a reversal/drop (i.e. inflation either doesn’t go up OR ideally, comes down)
• But – they won’t start lowering rates just yet … because history has taught them (hopefully) that if they change course too soon, they’ll just fall back into the same rut …
• Buyers thinking the “bottom has hit” … rates dropping .. consumers doing what they do best .. and boom, you’re back where you started before you even had a chance to get comfortable
• Sooooo, they (BoC) MUST AND WILL OVERSHOOT THE TARGET
• The argument that they’re over increasing rates .. is, in fact, true .. because the alternative is that they don’t and inflation continues to rise .. which is NOT AN OPTION as then it’ll be like a runaway train
• They’re choosing the lesser of 2 evils (IMO) .. mind you, they’re not innocent in all of this .. nor are they the “knights in shining armour”
• In fact, they in many ways, the BoC caused this by not acting sooner .. they reduced rates in/post COVID to stimulate the economy .. + injected 3-4x our normal currency into circulation + the supply chain was “broken” + you have pent up demand for goods & services .. and BOOM!  Here we are

So, the Central Banks have to stay the course, even when inflation numbers start to stay steady or slowly drop … so at least another 2-3 quarters if not into the end of 2023 IMO.

In 1991, Canada’s inflation rate was at ~5.6% while the lowest prime rate in 1991 was between 8-12%

• Borrowing cost more vs inflation

In 2022, Canada’s inflation rate is at ~6.9% while our prime rate sits at 5.45%

• Borrowing costs less vs inflation

Conclusion – The BoC still has lots of room to raise rates

Let’s see what the BoC comes back with tomorrow at its rate announcement – it’ll be interesting to see what Tiff Macklem and co. have in store for us! 

And again – we’re happy to translate all of this ‘mumbo jumbo’ into a productive dialogue as it relates to YOUR PLANS to BUY/SELL … as despite the doom and gloom theme … in actuality, there’s great opportunity as well.

Please let us know/DM us if you have any questions or would like to setup a call!