Bank of Canada maintains the rate. Inflation in advanced economies has continued to come down. The Canadian economy has entered a period of weaker growth. The tightness in the labour market has continued to ease gradually. However, wage growth has remained. “With recent evidence that excess demand in the economy is easing, and given the lagged effects of monetary policy, Governing Council decided to hold the policy interest rate.” Statement ends again with template sentiment: “The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Next BoC meeting in Oct 25, 2023. US Fed will make their next rate announcement Sept 20, 2023.

Bank of Canada raises rate by another 0.25%. Pointing to robust demand, strong consumption growth, tight labour markets, and some pickup in the housing market. Canada’s and US economy has been stronger than expected. Bond yields are up in North America and Europe as major central banks signal further interest rate increases may be needed to combat inflation.

Although inflation has eased, with a substantial and welcome drop from its peak last summer, there will be less near-term downward momentum in inflation, as last year’s data is out of the annual calculations. Underlying price pressures appear to be more persistent than anticipated. Governing Council “remains concerned that progress towards the 2% target could stall, jeopardizing the return to price stability.”

Remarks on immigration show opposing forces with strong immigration growth adding both demand and supply. Newcomers are easing workers shortages, but boosting consumer spending and adding to demand for housing.

Statement continues to end in the same way: “The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Next BoC meeting in Sept 6, 2023. US Fed will make their next rate announcement July 26, 2023.

Bank of Canada raises rate by 0.25%. Unexpected to some, but note that US did recently increase while Canada did not. Underlying inflation remains stubbornly high. Major central banks are signalling that interest rates may have to rise further to restore price stability. Canada’s economy was stronger than expected, housing market activity has picked up, labour market remains tight, excess demand more persistent than anticipated. Concerns have increased that CPI inflation could get stuck materially above the 2% target. “We will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target.”

This will ripple through to variable rate mortgages – for some the payments will increase, for the ones with the static payments, the amortization will increase; lines of credit payments increase; fixed rates now have less incentive for decrease; upcoming renewals will be impacted; we will have to watch how the housing market plays out as qualifying becomes more challenging.

Next meeting in July 12, 2023.

Bank of Canada maintains overnight rate. Some remarks about the US and Canada:

“US growth is expected to slow considerably in the coming months, with particular weakness in sectors that are important for Canadian exports.”

“In Canada, demand is still exceeding supply and the labour market remains tight. Wage growth is still elevated . Housing market activity remains subdued.”

Interesting remark about mortgages, in a way, higher mortgage payments will help with the monetary policy, they want us to be spending less. “As more households renew their mortgages at higher rates and restrictive monetary policy works its way through the economy more broadly, consumption is expected to moderate this year. ”

The CPI 2% target date now “by the end of 2024”.  BoC is “confident” that inflation will continue to decline in the next few months, but acknowledges getting to 2% “could prove to be more difficult because inflation expectations are coming down slowly, service price inflation and wage growth remain elevated, and corporate pricing behaviour has yet to normalize.”

Announcement ends with similar wording as last time, leaving room for multiple possibilities and covering their bases: “Prepared to raise the policy rate further if needed. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Next Bank of Canada announcement June 7 2023.  Next US Fed rate announcement May 3 2023.

article written by Sherry Cooper, Chief Economist, Dominion Lending Centres

US policymakers take emergency action to protect depositors at failed banks

Silicon Valley Bank (SVP) had a sterling reputation among the many tech start-ups it helped to finance. What brought SVB down was an old-fashioned bank run set off in 2021 by a series of bad decisions.

That year, the stock market boomed, interest rates were near zero, and the tech sector was flush with cash. Many start-ups held their working capital and other cash at SVB. The Santa Clara, Calif.-based lender saw total deposits mushroom to nearly $200 billion by March 2022, up from more than $60 billion two years earlier.

The bank invested much of that cash in long-dated Treasury bonds–normally considered a blue-chip investment. If held to maturity, the full value of the initial investment would have been returned to the bank. However, interest rates have risen dramatically since last March, causing the price of those bonds marked-to-market to decline precipitously. SVB risked large losses if it had to liquidate its securities portfolio.

This created a massive mismatch between the value of the deposits and its bond holdings. Moreover, this was not initially transparent to the depositors thanks to a 2018 relaxation of banking regulation much-favoured by SVB’s CEO. Regional banks were no longer required to mark their assets to market, nor were they required to succumb to the regular stress testing by the federal regulator where they prove they could survive black swan events. In addition, capital requirements became easier for these institutions.

In 2018, Trump eased oversight of small and regional lenders when he signed a sweeping measure designed to lower their costs of complying with regulations. An action in May 2018 lifted the threshold for being considered systemically important — a label imposing requirements including annual stress testing — to $250 billion in assets, up from $50 billion.

SVB had just crested $50 billion at the time. By early 2022, it swelled to $220 billion, ultimately ranking as the 16th-largest US bank.

In 2015, SVB Chief Executive Officer Greg Becker urged the government to increase the threshold, arguing it would otherwise lead to higher customer costs and “stifle our ability to provide credit to our clients.” He said that with a core business of traditional banking — taking deposits and lending to growing companies — SVB doesn’t pose systemic risks.

Another unique problem for SVB was the unusual concentration of deposits from certain types of clients. SVB’s depositors were heavily concentrated in the tight-knit world of start-ups and venture capitalists (VCs). In the past few weeks, VCs, founders, and other wealthy customers on social media and in private chats started discussing concerns that SVB could no longer pay its depositors. Some began to move their money out of the bank, triggering a loss of confidence and a run on the bank.

A Rapid Fall

On Friday,  Silicon Valley Bank became the biggest US bank to fail since the 2008 financial crisis.

Another beneficiary of easing regulatory oversight of small and midsize regional banks was New York-based Signature Bank, which also suffered a massive withdrawal of deposits. On Sunday, regulators shut down Signature, fearing that sudden mass withdrawals of deposits had left it on dangerous footing.

The back-to-back bank failures unnerved investors, customers and regulators, harkening back to the financial crisis in 2008, which toppled hundreds of banks, led to enormous taxpayer-financed bailouts, and sent the US and many other countries into a severe recession.

Canada, on the other hand, escaped much of the pain, experiencing a mild short recession. Although Canadian bank stocks plunged, our banking system was lauded worldwide as a regulatory example for the rest of the world.

Regulators Rush to Forestall Widespread Bank Runs

US Federal regulators scrambled to defuse the situation over the weekend, announcing on Sunday that all depositors would be paid back in full.

The Federal Reserve, Treasury and Federal Deposit Insurance Corporation announced in a joint statement that “depositors will have access to all of their money starting Monday, March 13.” To assuage concerns about who would bear the costs, the agencies said that “no losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”

The agencies also said they would make whole depositors at Signature Bank, which the government disclosed was shut down on Sunday by New York bank regulators. The state officials said the move came “in light of market events, monitoring market trends, and collaborating closely with other state and federal regulators” to protect consumers and the financial system.

The President said on Sunday and Monday, “I am pleased that they reached a prompt solution that protects American workers and small businesses and keeps our financial system safe. The solution also ensures that taxpayer dollars are not put at risk.”

He added: “I am firmly committed to holding those responsible for this mess fully accountable and to continuing our efforts to strengthen oversight and regulation of larger banks so that we are not in this position again.”

The collapse of Signature marks the third significant bank failure within a week. Silvergate, a California-based bank that made loans to cryptocurrency companies, announced last Wednesday that it would cease operations and liquidate its assets.

Amid the wreckage, the Fed also announced that it would set up an emergency lending program, with approval from the Treasury, to funnel funding to eligible banks and help ensure that they can “meet the needs of all their depositors.”

The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress.

The F.D.I.C. is usually supposed to clean up a failed bank in the cheapest way possible, but regulators agreed that the situation posed a risk to the financial system, which allowed them to invoke an exception to that rule. The regulator will tap the Deposit Insurance Fund, which comes from fees paid by the banking industry, to ensure it can pay back depositors.

The agencies said that “any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law.”

Monday’s Market Meltdown

Not surprisingly, the stock markets around the world opened sharply lower on Monday. The previous day, Goldman Sachs said that any Fed rate hikes were off the table for March 22 (I disagree). Bank stocks and energy stocks were hardest hit in virtually all markets. On the other hand, bonds surged, taking interest rates down sharply.

When banks collapse, others sometimes fear their banks and investments will follow. Even healthy banks don’t keep enough cash to pay out all depositors. So, if too many people panic at once and pull out their money — a classic bank run — it could lead to broader financial and economic calamity. And that is what the Biden administration and the Federal Reserve are trying to stop: a financial crisis prompted mainly by plunging confidence.

Canada’s Banks Are In Much Better Shape

Although most Canadian bank stocks plunged on Monday, the regulatory environment is far tighter than in the US. Moreover, Canadian banks are dominated by the Big Six rather than the thousands of banks in the US. They have nationwide branch networks with a large diversified base of clients with less exposure to technology, fewer deposit runoff issues and higher ratios of loans to deposits.

There is much less hot money coming into the Canadian banks than the small and midsize regional lenders in the US that focus on a specific niche part of the loan and deposit markets. Canadian banks are also much better capitalized.

Finance Minister Chrystia Freeland met with Canada’s superintendent of federal financial institutions, Peter Routledge, one day after his office announced it had seized control of SVB Financial Group’s branch in Canada.

SVB’s Canadian arm is unusual because it has a license to lend but cannot take deposits. While some Canadian startups had deposited with the bank’s U.S. arm, the Canadian operation held no client money.

SVB is a small lender in Canada. The tech financer had US$692 million in assets and US$349 million in outstanding loans in Canada as of December, according to OSFI filings. CIBC had $2.9 billion in loans through its innovation banking arm as of October 31, 2021. A bank looking to bolster its lending to startups could scoop up SVB’s loan book at a steep discount.

Yields in Canada fell sharply, following the Treasury market’s lead. Investors reversed course and bet the Bank of Canada will start cutting rates soon.

OSFI has already taken action to monitor daily the liquidity of Canadian banks in the wake of the SVB failure.

Bottom Line

Goldman Sachs was virtually alone when it said it expects the central bank to pass up the chance to hike interest rates next week. Markets still expect the Fed to keep up its inflation-fighting efforts, despite high-profile bank failures that have rattled the financial system. Traders on Monday assigned an 85% probability of a 0.25 percentage point interest rate increase when the Federal Open Market Committee meets March 21-22.

Surging bond yields played into the demise of SVB in particular as the bank faced some $16 billion in unrealized losses from held-to-maturity Treasurys that had lost principal value due to higher rates.

Is this enough to qualify as the kind of break that would have the Fed pivot? The market overall doesn’t think so.

For a brief period last week, markets were expecting a 0.50-point move following remarks from Fed Chair Jay Powell indicating the central bank was concerned about recent hot inflation data (see chart below).

Bank of America and Citigroup said they expect the Fed to make the quarter-point move, likely followed by a few more. Moreover, even though Goldman said it figures the Fed will skip a hike in March, it still is looking for quarter-point increases in May, June and July.

Next week’s meeting is a big one in that the FOMC will not only decide on rates but also update its projections for the future, including its outlook for GDP, unemployment and inflation.

The Fed will get its final look at inflation metrics this week when the Labor Department releases its February consumer price index on Tuesday and the producer price counterpart on Wednesday. A New York Fed survey released Monday showed that one-year inflation expectations plummeted during the month.

On March 8, 2023, the Bank of Canada maintained the overnight rate. This is in line with what was telegraphed from prior meeting’s announcement. “Inflation, while still too high, is coming down due primarily to lower energy prices. Employment growth has been surprisingly strong.” Global impacts mentioned: “United States and Europe, near-term outlooks for growth and inflation are both somewhat higher than expected in January. Strength of China’s recovery and the impact of Russia’s war in Ukraine remain key sources of upside risk.”

This month’s announcement ended with same statement as last month: “Governing Council will continue to assess economic developments and the impact of past interest rate increases, and is prepared to increase the policy rate further if needed to return inflation to the 2% target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Following later that week, the Canadian jobs report was released and pointed to sticky labour and unemployment numbers, with unemployment rate holding steady at 5%, near a record low. Also troubling to the Bank of Canada was the rise in wage inflation. This could jeopardize the rate pause. Next rate announcement April 12.

NOW LET’S TALK ABOUT THE US

Up to this current rate announcement, Canada and US have raised their rate by the same amount, total of 4.25% since last spring. Canada is the first one to signal a rate pause. The US has been using much stronger language regarding the continuation of rate increases. Here we may start to see a divergence. Canada is more sensitive to interest rates, as housing is a large part of our economy, which means we don’t need to tweak the rate as much as the US, to see changes. Theoretically we could run on divergence of up to 1.00%. But it is a delicate balance, as this will trigger further declines in the Canadian dollar, which in turn will affect our inflation.

All eyes area on US Fed rate meeting on March 22, to see if they will raise rate. This week US had data published. Unemployment rate came in higher than expect, but also their annual inflation rate showed that it is slowing.

Bank of Canada increases overnight rate by 0.50%. Your variable rate mortgage and secured lines of credit will increase. ‘Quantitative tightening QT’ continues. Admits “The risk of elevated inflation becoming entrenched has risen.”

“With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. ”

“Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”

Next meeting July 13.

Bank of Canada increases overnight rate by 0.50%. Your variable rate mortgage and secured lines of credit will increase.  The tone of announcement is rates need to rise due to inflation.  ‘Quantitative tightening QT’ in effect this month, which means  government no longer replacing maturing bonds on the Bank’s balance sheet.

Core inflation now declared at average almost 6% in the first half of 2022 and to remain well above the control range throughout this year. “Return to the 2% target in 2024.” But then provides interesting warning: “There is an increasing risk that expectations of elevated inflation could become entrenched. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored.”

Mentions US Federal Reserve and use of their monetary tools, demonstrating how our two economies are linked.

Announcement ends again with reminder “Interest rates will need to rise further. The policy interest rate is the Bank’s primary monetary policy instrument, and quantitative tightening will complement increases in the policy rate.”

Next meeting June 1.

Bank of Canada increases overnight rate by 0.25%. Your variable rate mortgage and secured lines of credit will increase.  Increased inflation is the theme of the announcement.  Announcement ends with note on expected future interest rate increases.

“CPI inflation remains well above the Bank’s target range.

Price increases have become more pervasive, and measures of core inflation have all risen.

Inflation is now expected to be higher in the near term than projected.

Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards. ”

Next announcement April 13.

Lenders still to confirm if they will match their prime rate with same increase. It is expected so, although there were a few times historically that it was not exact match. Your lender should be providing you with rate change notification.

The Bank of Canada decided to maintain the overnight rate. This means your variable rate mortgage remains unchanged. However, they presented strong language suggesting the rate will need to be increased.

The Bank has ‘removed its exceptional forward guidance on its policy interest rate’, which means these emergency rates will need to move. ‘Overall economic slack now absorbed’, the Bank is only maintaining its bond buying pace (‘reinvestment phase’). You may now be hearing the term ‘quantitative tightening’ (QT), which means the act of reducing the central bank’s holdings of Canadian government bonds on its balance sheet.

Over the last year, the Bank was stating inflation may be ‘transitory’, stirring many opinions on this assessment. But recently, this language has been dropped entirely from their announcements. The Bank admits inflation now remains well above the target range of 2%, but also expects ‘to decline reasonably quickly’ to about 3% by the end of this year and then gradually ease towards the target over the projection period. However, it bookends the announcement stating ‘The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation.’

In general, interest rate increases are imminent. The Bank has limited policy tools at their disposal, really, so they resort to talking about changes without exercising their tools. Basically raising the rates without raising the rates. They do not want to surprise the market.

Their policy decision is stuck between hot inflation and negative economic impact from the pandemic. Raising rates too quick would also have a negative impact, so they need to carefully execute. The market is fluid, and there are varying assessments on how many rates hikes we will see this year. Some traders are assessing 6 or 7 times this year, that is probably too much to bear realistically. A fairer assessment could be about four hikes this year, equal to maybe 1%, but we will have to see. Equally important is what the US Federal Reserve decides to do, as our economies are very inter-connected. The next Bank of Canada announcement is March 2.