When the Bank of Canada raised its benchmark interest rate for the first time in two years earlier this month, it sent an unmistakable message to borrowers that the era of cheap money was coming to an end.
While economists expect the bank to gradually raise its rate another half-dozen times or so this year, there’s a growing sense that the bank may need to start moving faster and more dramatically than anticipated to rein in inflation, which is already at its highest level in a generation.
Pricing in investments known as swaps suggests there is a good chance the bank will ratchet its rate up by half a percentage point when it meets in April, taking the benchmark rate to 1 per cent.
At central banks, caution is a virtue, so they tend to like to move up and down slowly, in 25-point increments, or a quarter of a percentage point at a time. Moving half a percentage point at a time is a sign the bank could be thinking more aggressive action is necessary.
The bank’s deputy governor said as much at a speech in San Francisco this week, telling attendees at a monetary policy conference that an uptick of household debt was “worrisome” and that the bank was “prepared to act forcefully” to ensure inflation doesn’t run too hot for too long.
“I expect the pace and magnitude of interest rate increases … to be active parts of our deliberations at our next decision,” Sharon Kozicki said.
How much and how fast
For Carlos Capistrán, an economist with Bank of America, strong language like that from a central banker is a clear sign that “everything is on the table,” when it comes to bringing down inflation.
That type of tough talk is the banks’ way of saying “We’re really going to fight this forcefully if we need to,” according to Capistrán.
It’s why he’s hiked up his rate forecast since Kozicki’s speech, to include not just one but three big hikes in quick succession. He’s now projecting the central bank to hike by 50 points at each of its next three meetings in April, June and July, and follow those up with smaller ones after that into next year until the bank rate sits at 3.25 per cent.
That’s almost double the 1.75 per cent the bank’s rate was at before the pandemic, and you’d have to go back to 2008, before the financial crisis, to find the last time the rate was that high.
To Capistrán, the reasons to speed things up are obvious. “Inflation is pretty high, the economy is really hot, the labour market is really hot in Canada and the [U.S.] Fed is about to hike 50 basis points as well,” he said in an interview. “So there are a lot of reasons why they may be more aggressive than usual this time around.”
The Bank of Canada has made it clear that it will hike its benchmark interest rate in the months to come. But exactly how many times and how high is the million dollar question for borrowers. (David Kawai/Bloomberg)
Fixed-rate loans aren’t immune
Aggression may be what’s required right now, but borrowers risk being the collateral damage in the central bank’s nascent inflationary fight.
Variable rate loans are pegged to the central bank’s rate, and they’ve been inching higher in recent weeks, in anticipation of the bank’s move.
Fixed-rate loans, meanwhile, aren’t impacted by the central bank’s rate and are instead priced based on what’s happening in the bond market, but there, too, the market has been flashing red warning signs for the past month: rates are headed higher, fast.
When borrowers take out a loan from a bank, they may assume the lender has that sort of cash on hand but in fact they borrow it on the bond market, and make a profit on the spread between the rate they pay to borrow money for themselves, and the rate they charge their customers when they lend it out in things like mortgages.
A good number of borrowers opt for five-year fixed rate loans, which makes the five-year Government of Canada bond the best proxy for what might be about to happen to fixed-rate loans, and the yield on that debt has jumped by more than a per cent in March — an unprecedented leap in the staid world of bonds.
The yield on the five-year bonds topped 2.5 per cent for the first time since the pandemic this week, which is pushing fixed mortgage rates well above three and even four per cent in response.
The Bank of Canada calculates that the average rate on a conventional mortgage at the big banks is currently 4.79 per cent, and according to rate comparison websites rates.ca and ratehub.ca, it’s not hard to find a variable rate loan right now for a little over one per cent.
If Capistrán’s projections are right and the Bank of Canada rate is headed to 3.25, expect variable rates to make a similar leap.
The impact could be dramatic. Right now, an uninsured 25-year mortgage of $400,000 at 1.5 per cent would cost $1,599 a month. But if that variable rate goes up to just four per cent, where fixed rate loans already are, the monthly payment jumps by more than $500 a month for the life of the loan.
Most mortgage holders walking thin line as rates rise: poll
24 days ago
Duration 2:06
An Angus Reid poll found that 58 per cent of homeowners say the costs of owning a home are already crowding out other parts of their budget. 2:06
‘Soft landing’
That’s $500 less in every home owner’s pocket to spend on other things, which is why the Bank of Canada is getting concerned. “Rising mortgage rates will weigh on their spending,” Kozicki said in her speech “and if enough of them were to slow their spending materially, it could affect the whole economy.”
Finding the right balance between reining in inflation without toppling the economy is the central bank’s job, and economists have a term for what the best case scenario is.
“What the central bank is trying to do and what we are all hoping for is what we call a soft landing,” Capistrán said. “To bring inflation down without engineering a recession.”
Andrew Husby, an economist with Bloomberg, says that so-called soft landing the bank is trying to pull off is being made even harder by the bank’s longstanding preference to be cautious when it comes to raising and lowering rates.
“If you’re too predictable and too gradual and you’re doing it just for the sake of being gradual and not for the sake of adjusting to economic conditions, that can be a problem and that can breed more inflation,” he said in an interview.
Ultimately, that stated predilection is why he’s not among those who’s expecting a bigger than usual rate hike next week — a path that he thinks should be good enough to accomplish its goal of bringing down inflation over the long run.
“As we get into the back half of the year, we’ll see inflation starting to come down,” he said. “Not as far as the bank would like, but at least headed in the right direction.”
TOKYO (AP) — Japanese technology group SoftBank swung back to profitability in the July-September quarter, boosted by positive results in its Vision Fund investments.
Tokyo-based SoftBank Group Corp. reported Tuesday a fiscal second quarter profit of nearly 1.18 trillion yen ($7.7 billion), compared with a 931 billion yen loss in the year-earlier period.
Quarterly sales edged up about 6% to nearly 1.77 trillion yen ($11.5 billion).
SoftBank credited income from royalties and licensing related to its holdings in Arm, a computer chip-designing company, whose business spans smartphones, data centers, networking equipment, automotive, consumer electronic devices, and AI applications.
The results were also helped by the absence of losses related to SoftBank’s investment in office-space sharing venture WeWork, which hit the previous fiscal year.
WeWork, which filed for Chapter 11 bankruptcy protection in 2023, emerged from Chapter 11 in June.
SoftBank has benefitted in recent months from rising share prices in some investment, such as U.S.-based e-commerce company Coupang, Chinese mobility provider DiDi Global and Bytedance, the Chinese developer of TikTok.
SoftBank’s financial results tend to swing wildly, partly because of its sprawling investment portfolio that includes search engine Yahoo, Chinese retailer Alibaba, and artificial intelligence company Nvidia.
SoftBank makes investments in a variety of companies that it groups together in a series of Vision Funds.
The company’s founder, Masayoshi Son, is a pioneer in technology investment in Japan. SoftBank Group does not give earnings forecasts.
Shopify Inc. executives brushed off concerns that incoming U.S. President Donald Trump will be a major detriment to many of the company’s merchants.
“There’s nothing in what we’ve heard from Trump, nor would there have been anything from (Democratic candidate) Kamala (Harris), which we think impacts the overall state of new business formation and entrepreneurship,” Shopify’s chief financial officer Jeff Hoffmeister told analysts on a call Tuesday.
“We still feel really good about all the merchants out there, all the entrepreneurs that want to start new businesses and that’s obviously not going to change with the administration.”
Hoffmeister’s comments come a week after Trump, a Republican businessman, trounced Harris in an election that will soon return him to the Oval Office.
On the campaign trail, he threatened to impose tariffs of 60 per cent on imports from China and roughly 10 per cent to 20 per cent on goods from all other countries.
If the president-elect makes good on the promise, many worry the cost of operating will soar for companies, including customers of Shopify, which sells e-commerce software to small businesses but also brands as big as Kylie Cosmetics and Victoria’s Secret.
These merchants may feel they have no choice but to pass on the increases to customers, perhaps sparking more inflation.
If Trump’s tariffs do come to fruition, Shopify’s president Harley Finkelstein pointed out China is “not a huge area” for Shopify.
However, “we can’t anticipate what every presidential administration is going to do,” he cautioned.
He likened the uncertainty facing the business community to the COVID-19 pandemic where Shopify had to help companies migrate online.
“Our job is no matter what comes the way of our merchants, we provide them with tools and service and support for them to navigate it really well,” he said.
Finkelstein was questioned about the forthcoming U.S. leadership change on a call meant to delve into Shopify’s latest earnings, which sent shares soaring 27 per cent to $158.63 shortly after Tuesday’s market open.
The Ottawa-based company, which keeps its books in U.S. dollars, reported US$828 million in net income for its third quarter, up from US$718 million in the same quarter last year, as its revenue rose 26 per cent.
Revenue for the period ended Sept. 30 totalled US$2.16 billion, up from US$1.71 billion a year earlier.
Subscription solutions revenue reached US$610 million, up from US$486 million in the same quarter last year.
Merchant solutions revenue amounted to US$1.55 billion, up from US$1.23 billion.
Shopify’s net income excluding the impact of equity investments totalled US$344 million for the quarter, up from US$173 million in the same quarter last year.
Daniel Chan, a TD Cowen analyst, said the results show Shopify has a leadership position in the e-commerce world and “a continued ability to gain market share.”
In its outlook for its fourth quarter of 2024, the company said it expects revenue to grow at a mid-to-high-twenties percentage rate on a year-over-year basis.
“Q4 guidance suggests Shopify will finish the year strong, with better-than-expected revenue growth and operating margin,” Chan pointed out in a note to investors.
This report by The Canadian Press was first published Nov. 12, 2024.
TORONTO – RioCan Real Estate Investment Trust says it has cut almost 10 per cent of its staff as it deals with a slowdown in the condo market and overall pushes for greater efficiency.
The company says the cuts, which amount to around 60 employees based on its last annual filing, will mean about $9 million in restructuring charges and should translate to about $8 million in annualized cash savings.
The job cuts come as RioCan and others scale back condo development plans as the market softens, but chief executive Jonathan Gitlin says the reductions were from a companywide efficiency effort.
RioCan says it doesn’t plan to start any new construction of mixed-use properties this year and well into 2025 as it adjusts to the shifting market demand.
The company reported a net income of $96.9 million in the third quarter, up from a loss of $73.5 million last year, as it saw a $159 million boost from a favourable change in the fair value of investment properties.
RioCan reported what it says is a record-breaking 97.8 per cent occupancy rate in the quarter including retail committed occupancy of 98.6 per cent.
This report by The Canadian Press was first published Nov. 12, 2024.
