Rate Decision Coming Up This Week

The BOC will be announcing its next move on rates on the week of October 28th. Whether they stay even or go down is a big question, but they most certainly won’t be going up anytime soon.

If rates do go down, expect the recovery and renewed dynamism in the GTA real estate market to be reinforced, and given added momentum. If they stay the same, the higher price and strong demand trends will stay healthy. Most experts predict that the BOC won’t cut rates. The number is low as is and the economic overall is perceived to be in very good shape. While BOC policy generally¬†does not diverge much from the monetary policy of the Fed, many market watchers expect that the Fed’s recent push to lower rates and revive QE (quantitative easing) won’t be necessary in Canada. Unlike the U.S., Canadian politicians rarely criticize or even talk about the BOC at all. At the height of the very high interest rates of the mid 90s, the Bank was politely scolded, and politicians sent letters asking for rate relief. Lately in the U.S., as many of us know, the President is openly at war with Fed Chair Powell; his own appointee. The C.D. Howe Institute, an elite, neoliberal think-tank based on Bay St. is calling for the BOC to hold off on rate cuts now and to wait until early 2020 for cheaper money.

In Washington, the consensus appears to point toward a 3rd consecutive cut in rates by Chair Powell this week. U.S. economic data is weakening, with manufacturing and housing showing slowdowns and the bulk of now much more subdued GDP growth dominated by consumers maxing out their credit cards and increased government spending. The Fed has also quietly began to increase its book of financial assets, and has long since ended its previously strong commitment to incremental reductions of its massive balance sheet. This basically that the Fed is once again buying assets, intervening in the market, and artificially raising asset prices while providing cheap money stimulus to Banks. There is growing repo activity, where the Fed is selling government bonds to investment only to buy them back within days at higher prices – effectively providing the buyers with excess capital that is not loaned. Repo activity is oversubscribed lately and is running the many tens of billions of dollars. This suggests a need for capitalization among U.S. financial organizations. 

As Tembo predicted, the once high GDP growth achieved months ago by a Trump tax cut and low interest rate stimulus is now falling back into traditional territory. If Powell does cut rates again, it will signal that the Fed is both concerned at U.S. economic data and also sensitive to the pressure and open criticism it is facing from a President who refuses to temper his language and who revels in his own bombast. Under Trump, the U.S. federal deficit is climbing again and is now close to the $1 trillion dollar mark. If the U.S. goes into a protracted and deep recession, it will have little wiggle room, little capacity for sustainable government fiscal stimulus, and almost no room to lower rates. A recession anytime soon would likely spell serious political trouble for a President who is staking his political future on a booming stock market, stable economy, and gradual, albeit ephemeral foreign policy retrenchment.