April 21st, 2022 | Market Watch

MARKET UPDATE | Bank of Canada and Inflation

April 13th

• Canada’s inflation rate hit 6.7% in the month of March
• Highest increase in our inflation rate since Feb 1991
• Coincidentally, last time our inflation rate was this high, our prime rate was sitting at 11.25% (vs. the 3.2% rate we’re at now)
• Not a big surprise, as the US just announced they’re inflation rate is sitting at 8.5%
• Canada had forecasted inflation would rise and hover around 6%, for at least the first half of 2022
• Again, doesn’t take a genius to realise this, given we’ve seen the cost of goods … never mind, the cost of everything, go up significantly over the last 12 months (gas, food, transportation, services etc.)
• During the April 13 Monetary Policy Report Press Conference, the BoC Governor, Tiff Macklem, said this:
  • “We now expect inflation to average almost 6% in the first half of 2022 and remain well above our 1% to 3% control range throughout this year. We then expect it to ease to about 2½% in the second half of 2023 before returning to the 2% target in 2024.”
• Mr. Macklem then followed, stating:
  • “With inflation broadening and remaining higher for longer, the risk is that Canadians start to think that high inflation will become entrenched.”
• And the latter IS A PROBLEM, as it contributes to a self-fulfilling prophecy
• If Canadians “start to think that high inflation will become entrenched”, they’ll likely want to get into the market sooner, as they’ll believe the cost of goods, services etc. and hence land, homes and all things real estate, will only continue to rise
• You can see the problem here, can’t you?
• More (reasonable or unreasonable) demand, means prices will continue to rise, and so will inflation
• And hence, the Governor introduced his third point – increasing interest rates
• Raising the policy rate is the main tool the BoC has to moderate demand, and prevent a persistent buildup in domestic price pressures
• However, it’s important to distinguish the difference and clearly establish the BoC’s target – that being to get inflation under control, not an interest rate target
• At least that’s our interpretation of Tiff Macklem’s comments, namely:
  • “…we have an inflation target, not an interest rate target. This means government councel is not on auto-pilot to a pre-established destination for the policy interest rate. How high interest rates will go will depend on how the economy responds, and how the outlook for inflation evolves.”
• So, while the BoC is being more aggressive than ever in its desire to raise rates, they’ll have no choice but to continue raising them until inflation is under control – and if that doesn’t happen in 2023 or 2024 – guess what? Up we go again … until demand is curbed, prices stabilize, and inflation numbers start to normalize
• At least that’s the idea, right?
• The message by the BoC is clear, money is going to become more expensive – so chill out, and stop spending like maniacs!
• Here’s the issue with that – it was only at the beginning of the pandemic that the BoC was conveying literally the complete opposite message – money is cheap, go spend all you want, in fact – stay home, we’ll send you lots and lots of money, buy online! (amazon stock anybody?)

So, what’s the bottom line?

• Ultimately, the BoC can do little but to increase rates in hopes of making money more expensive, curbing spending and trying to get inflation under control (down)
• In our opinion, the BoC Governor, Tiff Macklem, hopes that these announcements will effectively scare consumers
• And through their (Buyers/Investors/Consumers) perceptions, the market will see a shift
• So far, it’s doing so in that …
• We’re seeing showing numbers down
• Fewer showings = fewer potential offers
• Fewer offers = less likelihood for prices to go (way) above ask
• Hence we’re seeing more homes listed with “offers anytime” vs. on “offer deadlines” or “offer dates”
• Seller’s are also having to re-list, and price change, often within 1-3 weeks of coming to market
• All this change in the last 2 months essentially
• So, so far, the ‘plan’ seems to be working
• But, there is an issue with the Mr. Macklem’s plan … namely, so long as inflation is above the interest rates, fundamentally, the market is still encouraging YOU & I to spend
• Why? Because money TODAY at 3% is cheaper vs. money tomorrow, if inflation is at near 7%
• Hence, Tiff and co. will undoubtedly be keeping a super close eye on the market as we head to the next Bank of Canada announcement, set for June 1st
• Where we might expect yet another 50-basis point increase, should things not ease in a meaningful way

IMPORTANT LINKS:

• For Press Conference Monetary Report – CLICK HERE
• If you’d like to know more about Amir’s take on the Bank of Canada and Interest Rates, check out our blog post HERE