(article sent out to newsletter distribution list on January 28, 2025)
I scrambled today’s newsletter together to beat the crowd, ahead of the BoC rate cut tomorrow. You heard it here first, people! I might be totally wrong in my prediction, but hey, nothing ventured, nothing gained, right? It wouldn’t be the first time an economist was wrong.
With Trump throwing around punishing tariffs like Halloween candy, the BoC is now very worried about a fragile economy with lots of companies that totally depend on trade with the south.
We’re talking big, bailout stuff here. Don’t be surprised if you see huge manufacturing firms getting big bailouts from Ontario and Canada, specifically. They can’t have huge conglomerates fail. More on bailouts and what I think of those, below.
This morning’s front of the globe and mail was an article saying that the Gov of Canada is preparing a big aid package to ensure companies are going to survive the economic impact of tariffs. I’m really starting to realize that these tariffs will have real economic impact on our country, and it’s not just fluff to fill up the news-hour.
Another great read from the Globe and Mail. “US Tried Trumpian tariffs; it was a disaster”. January 21, 2025, report on business.
The coles notes is that similar tariffs destroyed global trade and made the Great Depression worse. The Smoot-Hawley tariff act was aimed at “keeping America for Americans”, and it backfired terribly.
After the president at the time, Herbert Hoover, enacted the tariffs, a global trade war was triggered and 20 countries retaliated with couter tariffs. International trade dropped by 65%. US exports fell from 7 billion per year in 1929 to 2.5 billion in 1932. The number of unemployed Americans tripled. The trade war intensified the great depression.
So yeah, these tariffs could be very harmful to our global economy.
So instead of being worried about inflation as it was in years past, the BoC is actually worried about “stagflation”. Let me explain. We know that tariffs will hurt our economic growth and raise unemployment. When that happens, our central banks lower rates in order to keep the economy moving at a good pace.
At the same time that’s happening, any counter-tariffs that we impose, plus a depreciation of our dollar, could in fact increase prices on goods, creating MORE inflation, and thereby pushing central banks towards tightening monetary policy (so increasing the rates).
A push and a pull. The BoC needs to lower the rates in order to keep our economy out of a bad recession, but they also need to be cautious on monetary policy because they know other outside forces are going to fuel inflation. In the end, we could have inflation during a period of economic recession. A double whammy of BAD. Not fun!
They go overboard, and cut rates by more than expected. Give the borrowers and businesses here in Canada a break on variable rate mortgages and also unsecured lending on the retail and commercial sides of things. Basically, any lending, secured or unsecured, that is pegged off prime rate. Most unsecured lending is.
We’ve seen this before. When outside forces cause pain to our economy, the BoC cuts rates, and by a lot.
Not unreasonable at all. Does it all happen at once, or tomorrow? Maybe not.
From 2007 to 2009, during the financial crisis, prime rate went from a high of 6.25% down to a low of 2.25%. A 4% drop.
During Covid, prime rate dropped from 3.95% at it’s height, to 2.45% at it’s low (Keeping in mind that the BoC overnight rate was 0.25%, and never really had room to go any lower).
The drop of 1.5% was significant. When we look at the time-frame of the Covid rate drops, they all happened in one month, March 2020, and were directly in relation to the Covid outbreak. Aggressively lowering the rate in order to keep our economy afloat.
So here, even if we don’t see 50Bps tomorrow, nothing is off the table for the BoC. We could see emergency cuts at any point, should the BoC feel the need to do so. And maybe even not on their scheduled days.
In mid 2024 we were at 7.20% at the height, and it only took the bank dropping to 5.45% for things to really seem in control (inflation). Now that there are outside forces potentially threatening our economic balance, my guess is that the BoC will use credit and lower rates in order to keep our economy going at some reasonable pace.
At prime rate of 5.45%, which is still relatively high, the BoC have more room to cut rates.
By making it easier for businesses and people to borrow and to then invest more money into business, our economy will expand. Perhaps the aim is to have our economy evolve into something new and maybe more resistant to outside forces. BoC knows that cheaper credit can fuel business investment. They want to keep the money flowing.
Remember, we’re still at 5.45% today, and 2.45% was the low. We could easily go down more without making credit “too cheap” like it was over Covid times. So going to 4.95% tomorrow isn’t out of the realm.
Are you hinging on my prediction? No. Do I know I’m for sure right? No. But I know I have about a 50% chance of being right. Wait, isn’t that an old saying? “There’s a 50% chance of something happening”. Is that a thing? No? Now I’m just being silly.
I could swear that in one of my risk and insurance classes one of the profs was trying to convince us that there’s a 50% chance of anything happening and 50% chance of it not happening. I think we were all skeptical, but something about it makes beautiful sense.
I get this question often. Should I wait for rates to come down?
I sometimes come back with the classic retort of, what’s more expensive? Renting and waiting for lower prices that might not materialize, and putting yourself in a worse position because prices went up? Or buying now, with the smaller risk that your asset might decrease in value over the short term.
I had a few clients back in 2015 that told me they were waiting. Did they regret it? Of course. In my opinion, as long as you are buying for the right reasons, and expect to stay in the home for at least 5 years or so, then yes, you will almost always, or 99% of the time, end up ahead. The trick here is not to wait for a slow buyers market to sell.
If the asset decreases in value over one or two years, but then increases in value strongly over the other three years, over a 5 year period, you will still end up ahead. And, your mortgage will have been paid down over that period too.
A double win, in most cases. Higher property value and lower mortgage. That’s what we’re aiming for.
Who should pay for bailouts? Personally, I think big business should pay for their own bailouts. That is, shareholders and previous or current owners of companies who’ve made bundles of money by owning a company when things are good, should pay for it when things goes bad.
Make RBC pay for it. Make Wal Mart pay for it. Make the Pattisons of the world pay for it. We all shop and bank there, don’t we?
Don’t make the taxpayer pay for it through government bailouts. That’s annoying for those of us that are all paying into the system more than our fair share. Let the big corps pay.
Or, make all the largest companies and manufacturers create a protection fund of sorts. Kind of like insurance, but without the “ew” that comes with, well, insurance.
Anyways, I do dream of a more fair economic world where bailouts aren’t funded by the small taxpayers.
Here’s a local realtor’s feedback after my last blog.
As an industry expert, he wants to see more regular postings of mortgage rates and things happening in the mortgage world. Point taken! And totally reasonable I think!
I’m here for the solution! MortgageMemo!
Mortgage memo is going to feature regular mortgage rates, financial news and commentary, and mortgage product updates. It won’t be a daily, but it’ll be at least once a week, possibly more, depending on whats happening that week.
It wont be fancy and it will probably just be sent straight from my gmail account. I don’t know yet. I come up with things on the fly.
If you’re a current subscriber on the Blog and want to receive Mortgage Memo, please let me know with a thumbs up, or by responding to this email. For those that regularly work with me or have asked for more regular news specifically, I’m signing you up automatically!
First Mortgage Memo will be sometime this week after the rate announcement tomorrow.
David Steinberg, AMP, BComm
Lead Mortgage Broker and Economist, Olympic Mortgage
2508587160
david@olympicmortgages.ca
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