Funding The Biggest Borrower

Steve Saretsky -

The calls for impending interest rate hikes continues. CIBC’s chief economist, Benjamin Tal, was out recently suggesting the Bank of Canada could hike its benchmark interest rate at least six times beginning in early 2022.

“I think there is a risk of getting into the market at today’s rates,” noted Tal. “We are still dealing with emergency interest rates. Let’s remember that these are not normal interest rates and eventually they will rise. If you’re in the market now and you’re thinking about buying this huge house with a huge mortgage, let’s think about it for a second. Can you afford this mortgage if rates will be 10, 150, 200 basis points higher? If not, buy a smaller house or rent.”

I can assure you many Canadians can not afford an additional 100 basis points, let alone 200 basis points on their debt. Ironically, Tal’s bank, CIBC, sure isn’t lending like a tsunami of crippling rate hikes are coming. CIBC’s total mortgage growth is running near 14% year-over-year, that’s even higher than during the 2017 bull market when regulators had to ask CIBC to pump the brakes. In other words, Tal’s comments are akin to the old term, watch what they do, not what they say.

Speaking of watch what they say. The Bank of Canada is desperately trying to control the narrative that they have inflation under their control. Tiff Macklem recently went on a rare CTV News interview to address inflation concerns, assuring the public they would alleviate by the end of 2022. They are desperately trying to find an excuse not to raise interest rates, after all, the biggest borrower is the Federal government and they have ambitious social spending plans that are depending on ultra low financing costs.

It is rather convenient that The Bank of Canada is set to renew its monetary policy framework later this year, as it does every five years. It’s widely believed the Bank will adopt a dual mandate, one which allows for inflation averaging, allowing for it to run hot during certain periods (hint: right now), while also including a full employment mandate. In simpler terms, this gives the Bank an excuse or air cover to not raise interest rates just because inflation is running above the current mandate of 2%.

Need I remind you that the job of updating the Banks monetary policy framework actually belongs to current finance minister, Chrystia Freeland. She is not exactly known for being frugal. Don’t forget Freeland was hired to replace Bill Morneau because it was rumoured he was against the massive deficit spending.

In other words, I remain highly skeptical of any interest rate policy normalization. Sure, interest can and will move higher in the short term. What matters is that REAL interest rates remain NEGATIVE for a prolonged period of time, not only to alleviate the massive debt to GDP burden but to finance this spendthrift government.

Three Things I’m Watching:

1. CIBC’s massive mortgage loan growth now running above 2017 pre-stress test levels. (Source: Ben Rabidoux)

2. Since Q2 2019 the Bank of Canada has funded nearly 90% of the budget deficit. (Source: Acorn Macro)

3. Canada’s union workers (about 30% of labour force) are set for wage increases with inflation set to hit 30 year highs in the coming months. (Source: Bloomberg)

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The Saretsky Report. December 2022