No intended spin on Shakespeare’s Hamlet Soliloquy, “To Be or Not To Be” but it works since Central Banks find themselves in a uncertain decision inflection point – do we pause on rate raises or continue?
Bank of Canada has raised rates 10 times since March of 2022 in pursuit of tamping down inflation that has proven stubbornly persistent. The last inflation read for July ticked upward to 3.3% from the previous read of 3.2% in June. Keep in mind that it peaked in the summer of 2022 at 8.1%, which equates to a 59% drop – impressive, right? But why did it move upward? Apparently two items, previously benign factors, namely energy and mortgage interest payments, moved up. There are lots of reasons contributing to increased energy costs but only one for mortgages. Cost of capital, driven by central bank policy, is now moving the inflation needle.
Central bank policy makers are aware of the pain that a rising rate policy has on consumers. It is, however, their primary tool to put downward pressure on demand across the spectrum of buying services and products which, in turn, allows supply to be greater than demand, leading to lower prices. That may be an overly simplistic Economics 101 explanation, but it serves the point. High inflation serves no one.
Bank of Canada held rates at 5% in early September. Evidence suggests that the economy is cooling. The hot labour market, in particular, that dominated most of 2022 and 2023 has downshifted. Wage inflation, a persistent spiralling contributor to long term inflation is much less of an issue. The same can be said for the US labour market. This is the trend central banks were likely waiting for. Francis Donald, Manulife’s Global Chief Economist stated on a segment of CNBC’s The Exchange recently, “the labour market is behaving exactly as I would expect if we’re heading into an early 2024 recession.”
Recessions, a natural part of the economic cycle may be shallow or deep. We all want the goldilocks version, not too deep or long, just enough to provide a reset and allow Central Banks to reverse course on rates. The consensus for reversal is 2024, giving borrowers, using variable rates, relief.
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