Monetary Policy - Op Eds

Published in the Financial Post

Media reports abound with speculation about how Bank of Canada interest rate cuts will lift the Canadian housing market. To be sure, you hear cautionary notes that the rate cuts that began with last week’s 25-basis-point cut will likely be slow. Less has been said, however, about how for many homeowners lower rates won’t actually reduce borrowing costs.

Variable-rate mortgages should see a full and immediate response to the rate cuts. But the 2024 CMHC Mortgage Consumer Survey shows only 23 per cent of mortgages are variable rate, five per cent are a fixed/variable combination and 69 per cent are fixed rate. The most common fixed-rate mortgages are for five years although three-year terms…

Published in The Globe and Mail

The Bank of Canada finally pulled the trigger on Wednesday and reduced its policy rate by 25 basis points. Forecasters were split between a June or July cut, but overall, the data were just too strong in favour of a cut – or too weak, as it were, considering the latest GDP numbers. 

This marks the beginning of a cycle of easing policy rates. The question for most commentators, investors, and consumers is now: How far and how fast?

The bank cut its policy rate from 5 percent to 4.75 percent. Despite the cut, a strong case can be made that monetary policy is more restrictive now than it was at the Bank of Canada’s last announcement on April 10. This augurs well for further declines…

The latest data (from February) indicate that the battle against inflation is almost over. Despite the encouraging inflation data, the Bank of Canada again held its policy rate at 5 percent on Wednesday. What gives? The bank, like many other central banks, was slow off the mark to raise rates as inflation took off. We worry it runs the risk of falling behind the curve again.

First, let’s examine why the bank might be hesitating to cut – the housing market and fiscal policy. Then, let’s examine why, in our view, that’s not enough.

Year-over-year headline inflation dropped inside the bank’s 1-3 percent range in January, and continued to fall in February, sitting at 2.8 percent. Core inflation, which strips out more volatile…

Headline inflation in January moved back into the Bank of Canada’s 1- to 3-per-cent target range. Yet on Wednesday, the bank again held its target for the overnight rate at 5 per cent. 

Why is the bank reluctant to cut? There are two main impediments: core inflation, and concerns over expectations. Both are fair reasons to keep rates where they are, but both measures are easing or should ease soon. An April rate cut may therefore be in the cards.

The bank’s mandate is to target 2-per-cent headline inflation. But headline inflation contains a number of volatile items, such as energy, and so to get a sense of underlying price pressures, many central banks have measures of core inflation that strip away these components…

News that Canada’s inflation rate fell in January has prompted fresh debate about cuts in the Bank of Canada’s policy interest rate, which has been at five per cent since last July. Though the year-over-year increase in the CPI was just 2.9 per cent in January, which is getting nearer the two per cent target, many observers expect the Bank will keep interest rates where they are at its next announcement in April. Why the caution?

Partly because we’ve been here before: the CPI dropped below three per cent last spring, then sprang back up. And also because, despite January’s encouraging headline number, measures of core inflation are still well above three per cent.

There is a straightforward reason for…