(April 17, 2024)
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On April 11, the Bank of Canada opted to stay put, leaving their benchmark policy rate steady at 5% (which, by the way, translates to a hefty 7.2% for Canada’s consumer-grade Prime Rate). But guess what? The consensus is growing that their sideline-sitting days are numbered. After the April 11 BOC announcement, the odds of a rate cut at the next scheduled BOC meeting in June were sitting at a solid 50%. But hold on to your hats, folks! After April 16’s Stats Canada CPI release, those rate cut odds spiked up to a whopping 68%. So you can pretty much bet on a quarter-point drop in June, nudging that 7.20% prime rate down to a slightly less suffocating 6.95%. Cue the collective sigh of relief from households across Canada burdened by mortgages and other debts linked to prime rate. And also let’s not forget about the provincial governments, corporations, and millions of small businesses, all of whom are also struggling with interest costs tied to the overnight lending rate.
Now, let’s talk about that rate drop. Sure, a 25-point rate cut might offer some respite, but let’s not kid ourselves—it’s hardly a gesture. Rates are still hanging out in the stratosphere when you compare them to the rock-bottom lows we recently departed from. Remember that swift ascent from 2.45% to 7.20% over the past three short years? Yeah, we’re inching back down, but we’re hardly hitting the reset button with that anticipated dip to 6.95%. The goal here is to get cozy with this new normal and adjust our financial expectations to a more, shall we say, moderate range of interest rates, somewhere between 4% and 6%. And while some folks are shrugging off this adjustment like it’s no big deal, there are plenty who are still struggling to find their footing.
But we can’t forget, there’s a downside to cutting rates, and it’s a bitter pill to swallow. Brace yourselves for the blow to our (already limp) dollar. If you’ve ventured beyond Canadian borders lately, you’ve probably felt the sting of our weak currency compared to the almighty USD and EURO. Trust me, I felt it firsthand while breaking bread with some Americans and Germans in Croatia a couple of weeks ago. They were astonished by the sorry state of our currency, assuming that being part of the G7 club meant we were rolling in dough like the rest of the big shots. Spoiler alert: we’re not. My dinner bill, converted from CDN to EURO, ended up a whopping 40% higher than theirs. Ouch. This got me thinking about our energy sector again, and our stubborn refusal to cash in on it. Just imagine all that powerful foreign currency flowing into our economy if we’d just loosen the purse strings on our resources (i.e. selling to other countries who will actually pay us market value for it). Not only would it cushion our economy from hardship, but it’d also give our dollar a much-needed boost and foot the bill for our ever-growing demands for infrastructure and social services (due to an aging population and explosive immigration). But hey, who needs all that when we can pat ourselves on the back for cutting greenhouse gas emissions by a fraction of a fraction, right? Meanwhile, the rest of the world is snickering behind our backs and snatching up opportunities we’ve casually tossed aside. Take, for instance, when the Germans came knocking, looking to strike a fuel supply deal amidst the Ukraine crisis, and we shrugged them off with our eco-warrior stance. Nice one, Canada. But I digress. Let’s circle back to our limp dollar. Brace yourselves, folks, because when the BOC starts its rate descent (likely in June), our dollar’s taking a nosedive right along with it. Lower rates mean a weaker position in the currency market, especially if we beat the Americans to the punch. Sure, it might give a little boost to our exporting sectors, but it’s going to hit us where it hurts when we’re importing goods from the US and Europe. And you know what that means? Prepare for an extended stay in this elevated-cost era. Now, I’m not saying we’re hurtling toward another inflation apocalypse, but let’s just say it’s not going to be a walk in the park.
So, what’s the bottom line here? If we want to minimize the pain and set a precedent for a real and meaningful recovery, we’ve got some tough choices ahead. We can either dial back on our green crusade and throw our weight behind the energy sector, or we can roll out the red carpet for Canadian entrepreneurs and give them a fighting chance to build international empires (I think we should do both). Because let’s face it, we’re not going to strike it rich peddling Tim Hortons coffee franchises to each other. It’s time for Canada to grab the wheel and take charge, LFG!
I can’t end without any mention of mortgages, so here’s a little something to chew on until next time: variable rate mortgages are making a comeback among Canadians. These days, everyone’s on edge when it comes to locking in their mortgage terms, whether it’s for a new purchase, a refinance, or a renewal. Fixed rates are on the decline, but mark my words—the way down will not be immediate and predictable, but rather bumpy and gradual. Same goes for variable-rate mortgages. So here’s the play: consider a variable rate mortgage with an aggressive discount and ride out the current environment for the next year or so as fixed rates gradually decline (along with prime rate). And when the time’s right, convert your variable rate to a fixed term without incurring any fees or break penalties. A fixed-rate mortgage doesn’t allow for this conversion/swap without incurring substantial break fees. The cost-effectiveness, flexibility, and revolving rate option of a variable rate mortgage place the reins in the mortgage holders’ hands allowing them the freedom to adjust their position in the future.
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