Inflation is down and rate cut hopes are up.
In fact, inflation is at a 5-month low–thanks in large part to the 1% GST cut. Meanwhile, the Bank of Canada’s new governor, Mark Carney, is acknowledging further U.S. threats to Canada’s economy.
This has RBC expecting a 1/2% rate cut March 4 and another 1/2% cut by mid-2008. TD, among others, is also predicting a 1/2% reduction March 4.
“The core (inflation rate) is nicely below the Bank of Canada’s worry level,” says Scotia Capital’s Steve Butler. “It points to a path of rate cuts coming up…”
Despite the above, Carney expresses worry that foreign demand may soon heat up our commodity-heavy economy. This view coincides with that of others (like CIBC’s Benjamin Tal) who feel Canada’s economy may surprise people late this year.
Sure the “If you don’t buy anything you need to live on” (core) number is still low the description says it all. If the goods are 1% lower due to the GST reduction, the real inflation rate would be 2.4% and 3.2% if the government hadn’t swooped in with their near useless GST cut.
They are going to try to make our housing bubble far worse than the U.S. by cutting our rates further to make the homes seem more affordable, then they will jack the rate up again to make record profits. I sure hope I can get some cash together to invest in banks.
Our housing in some areas has already increased the home cost to median income ration far beyond what was seen in the USA, it’s only a matter of time now before we follow along the USA’s path of home prices falling and greedy whining.
Also, remember to keep a hard hat on at all times . . . you know . . . in case of the sky.
The bank of Canada has a mandate to keep the inflation rate at 2%.
But I wonder… if house prices have doubled and increased by more than our US counterparts does that not present a moral hazard when the housing bubble collapses?
I think the problem here is that we’re not sure if we’re truly in a housing bubble or not. The reason: Canada’s growth is mostly focused on immigration rather than growth from within. Because of this, the housing market is still seeing growth as immigrants tend to arrive with money and a need for a place to stay. So even if the average Canadian might not be able to afford some of the housing prices, the average immigrant probably will.
Note: I have not done any research on the above statement so it is purely speculation on my part but from what I have heard, this appears to be true. Hopefully someone here has access to facts to either back or dismiss the theory I presented.
Hi Traciatim, In many ways I think you’re right. Until the BoC changes focus from the core rate, however, the core number will drive interest rate policy. Regarding the GST cut, it’s small I know (an income tax cut would have been nicer). But, it has lowered prices–so it must be considered. All that said, your concerns seem valid. For what it’s worth, my gut feel (and I could be way way off) is that Canada’s economy is–or will be–stronger than most anticipate later this year. If so, your concern about the BoC’s rate cuts could be prescient.
Cheers, Rob
Hi Patrick,
You absolutely right that immigration has a big effect–at least in places like Vancouver. For example, according to the NY Times, in 2006 there were 36,321 more people living in Vancouver than in 2005. 72% of the newcomers were immigrants. These folks need roofs too!
Rob