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Posthaste: Don't expect Bank of Canada rate cuts to amp up the economy, RBC says

Edmonton Journal sent this email to their subscribers on June 14, 2024.

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More like 'easing off the brakes than stepping on the gas' View this email in your browser Image Good morning, It seems Canada's largest bank isn't expecting a whole lot of upside in the short-term from what appears to be the start of a campaign by the Bank of Canada to bring interest rates down. Interest rate cuts won't provide an immediate boost to Canada's lagging economy or the debt payment relief some households are seeking, a new analysis from Royal Bank of Canada suggests. Despite signs around the world that economies are starting to rally, including in the euro area and the United Kingdom, Canada's economy has continued to struggle on a GDP-per-capita basis with the metric running three per cent below levels seen in 2019. Craig Wright, senior vice-president and chief economist at Royal Bank of Canada, notes that is a 10 per cent swing relative to the U.S., where per capita GDP is up seven per cent in that timeframe. "The global economic growth backdrop has shown signs of improvement, but Canada’s economy continues to underperform," Wright said in a report published on Wednesday. "The Bank of Canada’s pivot to cut interest rates in June is more akin to easing off the monetary policy brakes than stepping on the gas." Indebted households will obviously cheer rate cuts, but "the lagged impact of past interest rate increases will continue to push debt payments higher," Wright said, estimating that moves by the central bank likely won't lead to an uptick in growth until sometime next year. For 2024, RBC predicts real GDP will come in at one per cent rising to 1.8 per cent in 2025. For the first time in four years, the Bank of Canada cut its benchmark lending rate by 25 basis points to 4.75 per cent on June 6, citing, among its reason for doing so, a weakening economy, excess supply and slowing inflation. Most economists, RBC's among them, expect central bank officials to cut by 25 basis points at each of the remaining four rate announcements scheduled for this year in July, September, October and December. Doing so would bring the bank's rate to 3.75 per cent by the end of the year. "We assume another 75 basis points of BoC cuts this year, but that will still leave the level of interest rates above those neutral levels and subtract on net from economic growth, just by less than currently," Wright said. The reason for that is the expected cuts would still leave the bank's rate well above the 2.25 per cent to 3.25 per cent range that the Bank of Canada considers neutral, meaning it neither stimulates nor suppresses economic growth. Looking at the mortgage landscape, Royal Bank's chief economist estimates there are approximately $200 billion worth of mortgages, most with four- and five-year terms, that will be renegotiated this year with $275 billion up for renewal in 2025. Households will feel the impact of higher rates, but Wright said the jump in payments appears "manageable" against the increases in incomes that have risen dramatically from pre-pandemic levels. "The expected payment shock this year will still be large for individual households impacted, but accounts for a relatively small 0.2 per cent of total Canadian household incomes, according to our estimates," Wright said. However, the bank's chief economist doesn't foresee rate cuts helping with housing affordability due to a "structural" shortage of accomodation, nor does he see lower rates helping with declining productivity. RBC also produced GDP forecasts for the provinces. Ontario, Quebec and British Columbia are expected to grow the slowest — 0.5 per cent, 0.7 per cent and 0.8 per cent, respectively — of the provinces given that they are home to many of Canada's most indebted households. GDP in the Prairie provinces is expected to expand more than the country as a whole with Alberta's economy growing 1.7 per cent as "households and businesses — which took past interest rate hikes in stride — have already amped up spending activity in anticipation of rate cuts," Wright said. "A slight pickup in oil prices should help as well." Was this newsletter forwarded to you? Sign up here to get it delivered to your inbox. LEADING INDICATOR WHAT CANADIANS OWE Household credit market debt to household disposable income 200 ..................................................................................................................................................... Q12024:176.4% QTG oo 15Q s 105 s 100 ] A A AL A A LA A LA LA LA LA LYY L L L L L L L L L L L A G L L 95 00 05 10 15 20 SOURCE: STATISTICS CANADA FINANCIAL POST - Advertisement Statistics Canada says the amount Canadians owe relative to their income in the first quarter edged lower compared with the fourth quarter of 2023 as growth in household disposable income outpaced the growth in debt. The agency says household credit-market debt as a proportion of household disposable income was 176.4 per cent in the first three months of the year on a seasonally adjusted basis. The result compared with 178.0 per cent in the fourth quarter of 2023. In other words, there was $1.76 in credit-market debt for every dollar of household disposable income in the first quarter of 2024. Meanwhile, the household debt-service ratio, measured as total obligated payments of principal and interest on credit market debt as a proportion of household disposable income, was 14.91 per cent in the first quarter of 2024 compared with 14.98 per cent in the fourth quarter of 2023. The move came as household disposable income rose 1.9 per cent, while debt payments increased 1.4 per cent. — The Canadian Press FP MUST READS Tiff Macklem says things are going to be difficult if productivity doesn't grow Bank of Canada has asked businesses to innovate — just like they did during the pandemic — to boost Canada's productivity David Rosenberg: Poor economy means Bank of Canada has to keep cutting rates All the central bank is doing now is damage control Dream of a Western Canadian bank just met reality facing regional players John Turley-Ewart: CWB had a mission to serve those in the West. It will be better positioned to do so as part of National Bank Canada needs 'laser-focused' productivity strategy, Dodge says Gross domestic product per capita in Canada has lagged other advanced economies for decades MCLISTER ON MORTGAGES Want to learn more about mortgages? Mortgage strategist Robert McLister's Financial Post column can help navigate the complex sector, from the latest trends to financing opportunities you won’t want to miss. Plus check his mortgage rate page for Canada's lowest national mortgage rates, updated daily. QUOTE OF THE DAY “I’M NOT GOING TO PRETEND THAT WE GOT EVERYTHING RIGHT IN OUR PANDEMIC RESPONSE” — Bank of Canada deputy governor Sharon Kozicki, during a speech on Thursday, indicates that the central bank didn't make all the right calls during the pandemic. She also pushed back on criticisms that policy actions including quantitative easing and forward guidance on interest rates were missteps that fuelled inflation. MARKET SIGNALS S&P/TSX S&P 500 Futures WTI Futures (Per Barrel) Gold Spot (Per Ounce) U.S. Dollar Index Canadian Dollar/U.S. Dollar Source: Bloomberg. The percentage change is daily €D D> € € € 21,698.11 5,409.75 US$78.46 US$2342.50 105.60 72.69 1.20% 0.54% 0.20% 1.06% 0.38% 0.09% - Advertisement BREAKING TODAY * Data: Canada manufacturing and wholesale sales for April * Earnings: Kroger PERSONAL FINANCE Problems arise when the generative language AI chatbots — such as OpenAI OpCo LLC’s ChatGPT, Microsoft Corp.’s Copilot, or Meta Platforms Inc.’s AI — deliver what looks like sound financial advice, but it’s either incorrect, incomplete or not in someone’s best interests. If you aren’t familiar enough with the topic to discern what helps from what hurts, the answers can steer you in the wrong direction. With that in mind, here are three ways advice from AI tools can help solve or deepen your money woes * * *  Are you worried about having enough for retirement? Do you need to adjust your portfolio? Are you wondering how to make ends meet? Drop us a line with your contact info and the general gist of your problem and you could be featured in an upcoming Family Finance column (we’ll keep your real name out it, of course). If you have a simpler question, the crack team at FP Answers, led by Julie Cazzin, can give it a shot. Today’s Posthaste was written by Gigi Suhanic with additional reporting from The Canadian Press and Bloomberg. Have a story idea, pitch, embargoed report, or a suggestion for this newsletter? Email us at [email protected], or hit reply to send us a note. Sign up now for more of FP’s free, in-depth newsletters Download the Financial Post App: LA e e R ‘ App Store ANDROID APP ON > Google play Connect with us on: © 2024 Postmedia Network Inc. All rights reserved. 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