March 28, 2024
There was a sense the tide had turned when Swiss National Bank surprised markets and cut its interest rate on Thursday — the first of the central banks in the developed world to do so.
It put a big question out there — who’s next? The stage is being set for other central banks to follow the Swiss, says Avery Shenfeld, chief economist of CIBC Capital Markets — but when isn’t the only question — it’s also by how much.
“Once inflation looks sufficiently tamed, the dosage will come down to just how much of an economic squeeze the existing level of rates has applied,” he said in his weekly note Friday.
Canadians, he argues, could use a bigger dose of rate relief than most in the world.
Higher interest rates have clearly had a big impact on Canadians, especially in comparison to their neighbours to the south. Canada’s per capita consumption is falling, but American consumers, up until recently, have kept up their spending, helping the U.S. economy avoid the slowdowns seen here, and in the United Kingdom and much of Europe, said Shenfeld.
How mortgages work in different countries has a lot to do with that impact. Americans largely have 30-year mortgages, while mortgages in Canada, the U.K. and Australia reset about every five years. Germans often lock in for 10 years or more, but the U.S. is the only place where a 30-year fixed rate is the norm, he said.
But even compared to countries who share shorter mortgage terms, Canadians are worse off. The ratio of home prices to incomes in Canada has risen 40 per cent since 2015, according to Organisation for Economic Co-operation and Development data, “far eclipsing what’s been seen in other countries where mortgage borrowers are also exposed to rising rates,” said Shenfeld. Countries with older populations like Japan and some EU nations also have fewer outstanding mortgages.
“Put it all together, and Canada’s household sector was set up to be among the most vulnerable to rising mortgage rates,” Shenfeld said.
As a result, Canada could need bigger interest rate cuts to get the economy moving again. That is reinforced, he said, by the fact that about half of all mortgages still face renewal under considerably higher rates. Those coming due in 2025 will be facing an adjustment up from when rates were near zero in 2020.
“Whether Canada will be next after the Swiss, or wait a bit longer, there’s a good reason to expect that rate cuts will have to be deeper here than in countries with lower household debt burdens, cheaper houses, or locked-in mortgages,” said Shenfeld.
How deep then is the question, and to that there may be no easy answer. Much will depend on whether data to come shows the economy holding its own or tanking.
