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LACKIE: Here comes the Bank of Canada with the sledgehammer

Rather than being in the throes of a painful recession, Canada’s economy is running hot

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Going into Wednesday’s announcement following the June meeting of the Bank of Canada, most of the people I know who tend to have intelligent opinions on such things weren’t expecting too much.

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Sure, there was chatter of the possibility of a small increase to the benchmark interest rate, but it would seem that few actually thought it would come to pass. More likely, many opined, we would see Tiff Macklem, governor of the Bank of Canada, hold this month and then get serious in July if absolutely necessary.

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Not so.

While it may have only been a quarter-point bump, symbolically it was significant: The conditional pause that had evidently revived consumer confidence and resurrected the housing market was gone. The bond markets, already bracing for such a move, immediately priced in further tightening and we saw fixed rates shoot back up again. Consensus now says that any talk of rates coming back down again should be a 2024 discussion.

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Andrew Dreyer, mortgage agent with Outline financial, summed it up for me:

“The central bank’s commentary suggests they were looking at all economic factors: Reduction of inflation starting to stall, predicted slowdowns in economic growth yet to be seen, and a tight job market. It appears the central bank is taking a pre-emptive strike, and this is a significant shift to where they were at the last announcement. It’s being received as overall trying to avoid any large resurgence of inflation in the coming months, as this has been a past problem in similar historical circumstances”

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And yes, the elephant in the room is that the economy was supposed to be in shambles by now. Yet, rather than being in the throes of a painful recession, Canada’s economy is running hot with April’s consumer price index ticking upwards for the first time in ten months.

But even that as a compelling factor is a bit of a head-scratcher given that, according to StatsCan data, the April uptick in inflation was largely the result of elevated interest rates in turn driving housing costs up with mortgage debt and rents surging.

This should surely help, no?

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However, if this was mainly an attempt to lay the smack down and cool a housing market that has been running alarmingly hot this spring, mission likely accomplished. Except, of course, for the fact that the data was already starting to show the market slowing down for summer. New listings are up while showings and offer registrations are on the decline.

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The activity we’ve seen hasn’t been the result of the same irrational exuberance that fuelled the pandemic run-up — it’s been the byproduct of almost non-existent inventory in conjunction with federal policies doing almost everything to keep the market alive, demand strong and prices sticky.

Could it be that the granular data the Bank concerns itself with is showing more signs of trouble on the horizon? It’s a strong possibility.

But on its face, this move is intended to reverberate through the economy. It will bring more pain to borrowers, make it harder for renters, and drive our broken Canadian housing market further into shambles.

@brynnlackie

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