{"id":10277,"date":"2022-12-12T20:31:42","date_gmt":"2022-12-13T04:31:42","guid":{"rendered":"https:\/\/www.stevesaretsky.com\/2022\/12\/news\/a-pause-but-not-a-pivot\/"},"modified":"2022-12-15T10:33:42","modified_gmt":"2022-12-15T18:33:42","slug":"a-pause-but-not-a-pivot","status":"publish","type":"post","link":"https:\/\/www.stevesaretsky.com\/2022\/12\/news\/a-pause-but-not-a-pivot\/","title":{"rendered":"A Pause, But Not a Pivot"},"content":{"rendered":"
To no surprise, the Bank of Canada raised rates again this past week. Another 50bps. Interest rates are now up a whopping 400bps since this tightening cycle began in March. According to Macquarie Research, this is the sharpest calendar year of rate hikes on record going back to 1936. The most common rebuttal you see circulating online is that rates are still low from a historical basis. While that may be true it is an irrelevant point if you\u2019re not also considering the levels of debt. I often hear people comparing todays rate hiking cycle to that of the 1980s. The Bank of Canada had rates as high as 18% in 1981 so we have a lot more room to go! Except household debt to GDP levels were also around 50% in the early 80\u2019s, today household debt to GDP sits at nearly 110%. <\/p>\n
<\/td>\n<\/tr>\n<\/tbody>\n<\/table>Source: Acorn Macro, Richard Dias<\/figcaption><\/figure>\n<\/p><\/div>\n
You could also buy a single family house on one income at roughly two to three times your annual salary in the 1980\u2019s. Today that is obviously not the case. The recent 400bps move in interest rates is blowing up highly indebted household balance sheets. Let\u2019s look at a few examples. <\/p>\n
In other words, many mortgage holders are going to have to aggressively start trimming discretionary spending. This is the demand destruction the Bank of Canada is hoping for. Inflation is going to come down, give it time. It is already happening if you look close enough. The three month annualized rate of inflation in Canada is now running at 3.7%. It should not come as a surprise that The Bank of Canada is now signalling a pause. The bank now says it “will be considering” whether or not the rate has to go higher. This is a big change from each previous meeting where they emphasized “that rates would have to go higher\u201d. It is worth emphasizing here that a pause does not mean a PIVOT. An overnight rate paused at 4.25% and a prime rate of 6.45% is not good news for housing. Your typical mortgage hovers between 5.5-6%, equating to at least a 30% reduction in purchasing power. <\/p>\n