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Bank goes 50bps, first sign of possible pause
December 8, 2022
10:37 am
MattS
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savemoresaveoften said
In my mind, BoC will not simply take interest rates as high as it needs to get inflation down to 2%, cuz that terminal ON rate may need to be 6% or higher. That will wreak havoc to Canada's economy, not just a simple recession. Thus the bank's compromise will be allow inflation to get down to 3%, and call that the new normal over the next year.

There are simply too many variable loan products out there, variable mortgages, HELOC, CC debt out there, that the impact of higher prime rates hurt the economy a lot more than say 20 years ago when the biggest consumer debt was a fixed rate mortgage.  

you will be correct they will adjust 3% as something they can live with. You wait this story has legs yet IMO. At my own workplace they just announced 4% annual raise as our retention rates have slipped... On all this factories inputs we are looking at 30%+ inflation on our inputs over a wide array of high expenditure items. Laptops 35%, Dock plates 38%, electronic device Maint program, 33%, loading truck jack stands 25%, Load securing bars, 37%, tow motor Maint labour contract renewed 35%, new equipment leases 41%, tow motor tires 50%...... to name just a few that i am personally involved with. Im locked into contracts on piece prices and these contract each have 1-4 yrs to expire. as each one expires and we re-quote on new business its my turn to re-coup costs and I finally get to pass along the 40% increases as our vendors have done with us. So inflation may well return to 2% short lived but I need to gap up 40% in 3 yrs when we re-quote. And what do they measure with CPI at 8%. I can tell you regardless of what they say, they dont measure any of our factory inputs that are driving costs thru the roof!!!!!!

December 8, 2022
6:13 pm
Loonie
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Wow! That's an amazing list, Matt.

I've been saying for a while now that I don't see how inflation can quieten down for quite a while because of a variety of factors. These are certainly some of 'em.

December 8, 2022
7:06 pm
mordko
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An anecdote isn’t stats.

Having just bought a laptop, I have not noticed a 35% price hike over 3 years, let alone 12 months. Of course yours could be different. But the one I bought has more memory, CPU and bigger screen than a slightly cheaper 1 from 3 years ago. All technological improvements are accounted in CPI calcs because 12 months ago you bought an inferior product.

Still, no question that prices have been going up and there would need to be pain for inflation to get back to target. Companies will need to be bankrupted because demand wouldn’t be there at higher prices. Job losses. And the government would have to restrain itself from compensating “the poor” by issuing more inflation-driving handouts. And QT has to be maintained. Supply can’t be increased quickly so demand has to be dampened.

No idea if inflation persists or not but it does not have to.

December 8, 2022
7:23 pm
Loonie
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mordko said
An anecdote isn’t stats.

Having just bought a laptop, I have not noticed a 35% price hike over 3 years, let alone 12 months. Of course yours could be different. But the one I bought has more memory, CPU and bigger screen than a slightly cheaper 1 from 3 years ago. All technological improvements are accounted in CPI calcs because 12 months ago you bought an inferior product.
  

You say that anecdotes aren't stats. Quite true. But then you produce another anecdote to try to negate the previous one.

Anecdotes, when not resorted to for polemical reasons, are sometimes like the canaries in the coal mine. They are the harbingers of what is to come later in the form of stats.
I don't know what Matt's company does, but i know his prices are going to be reflected somewhere in tomorrow's stats and likely someone else's pain, maybe mine.

December 8, 2022
7:48 pm
mordko
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Yes, I was quoting another anecdote to tell that experiences can vary and as such are meaningless. I have more anecdotal experiences, including for the things we produce and sell but surely its pointless.

That’s where CPI comes in. To collate various anecdotes to make sense of the overall picture. Its not a perfect representation of reality by any means but the cost of laptops is covered with the appropriate weighting and is reflected in the latest 6.9% inflation figure (rather than 8%). Along with the cost of second hand cars which dropped.

December 8, 2022
7:59 pm
AltaRed
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In fairness, Mordko was simply demonstrating laptops did not go up by 35%. If the laptops in MattS' business went up 35%, that business does not know how to buy laptops. Regardless, that is what the CPI model is for as Mordko correctly points out.

December 8, 2022
9:16 pm
Loonie
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I'll let Matt tell us about his laptop, but of course it's only one of his many examples.

And maybe he can tell us when he expects his new prices to be reflected in the CPI.

As for the CPI, it doesn't tell us anything about what prices will be next month or in six months from now. Statistics are retrospective.

You can tell a lot about what is coming by looking at what's in front of you, as Peter Lynch wisely noted. Keep your eyes and ears open - and watch for those canaries!

December 9, 2022
3:10 am
mordko
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Loonie said
I'll let Matt tell us about his laptop, but of course it's only one of his many examples.

And maybe he can tell us when he expects his new prices to be reflected in the CPI.

As for the CPI, it doesn't tell us anything about what prices will be next month or in six months from now. Statistics are retrospective.

You can tell a lot about what is coming by looking at what's in front of you, as Peter Lynch wisely noted. Keep your eyes and ears open - and watch for those canaries!  

Quite right, CPI is a backwards looking factor. Matt implied that his backwards looking anecdotal experience with a tiny slice of CPI inputs shows that CPI estimates are wrong (see his last 2 sentences). That’s a very poor reason to question CPI numbers even if its not just the laptop.

He then proceeded to make a claim about future inflation using his factory’s input costs as the basis. As someone who owns a small business and sells to thousands of customers, I find that input costs have some impact but don’t set the price. Its all about supply and demand.

Perhaps Mr Lynch can tell what’s in front of us better than Mr Market. The rest of us can’t. Mr Market is telling us there is a recession next year. If true, that would hurt demand. Mr Market is telling us oil price will stay low. I am struggling to believe that but not gonna argue with Mr Market. Mr Market is telling us that 10-year average inflation in the US will be 2.3% (after high inflation in the short term).

December 9, 2022
5:04 am
savemoresaveoften
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I think a good portion of the participants on this forum are retirees on GICs and fixed income etc. There seem to be a general bias towards: Inflation to stay low at 2% in the future PLUS fixed income interest to stay/ be high. Its human nature always that one wishes for what benefits oneself. Unfortunately finance 101 will ensure low inflation AND high fixed income interest do not coexist for long period of time.

I too wish for high fixed income rates but also realize it comes at a price, which is higher inflation.

December 9, 2022
10:19 am
MattS
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to be clear, im a 25 yr empl at the same auto parts manufacturing firm. I dont own the business. I work in the supply chain / logistics / prod. planning areas of the business. I'm not a know it all by any means. My post was in response agreeing with "savemoreoften" that I didnt think we would return to 2% and that expectations would be managed by adjusting up the target to a higher level people can live with, like his suggested 3%. I was more or less theorizing, not being an expert in economics but some functioning knowledge, that is it possible inflation will settle down to the 2-3% range after this yrs 8% & then out of know where will inflation rear its ugly head in a couple yrs time when firms like the one I work at, have the opportunity to restore their shrinking margins back to where they need to be. & we will wonder where its coming from.. We are locked into pricing agreements.. Not sure what other industries or what percentage of Canadas businesses would be under the same situation. Another anecdotal example is it was just announced today that our skilled trades that make $39/hr will be receiving 7.5% wage increases so we can retain them. Anecdotally , we will also take this into account next time the OEMS remdodel. What effect will this have 2 yrs from now when we gap up, maybe not enough to move the needle.. Thats what I dont know about. Is this or isnt this a canary. dont know.. its information...

December 9, 2022
10:50 am
HermanH
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savemoresaveoften said
I think a good portion of the participants on this forum are retirees on GICs and fixed income etc. There seem to be a general bias towards: Inflation to stay low at 2% in the future PLUS fixed income interest to stay/ be high. Its human nature always that one wishes for what benefits oneself.

I agree that is likely the demographic of this forum. Everyone is looking for that high interest 5.88% rate to tide them over the dips to 2.5% in the next five years.

December 10, 2022
7:14 am
savemoresaveoften
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Just came across this, confirmed my original title: first sign of possible pause 🙂

BoC deputy governor Sharon Kozicki took pains to confirm the interpretation of yesterday’s rate hike announcement:

The Bank of Canada could pause interest rate hikes as early as next month as it shifts to a more “data-dependent” approach to monetary policy, although the bank is still prepared to be “forceful” if necessary, deputy governor Sharon Kozicki said on Thursday.

“We are moving from how much to raise interest rates to whether to raise interest rates,” Ms. Kozicki said in a speech to the Urban Development Institute of Quebec in Montreal.

She was speaking the day after the central bank delivered another 50-basis-point rate hike, lifting the benchmark lending rate to 4.25 per cent, the highest level since early 2008.

After seven consecutive rate hikes, which have dramatically increased the cost of borrowing for Canadians over the past nine months, the bank is preparing to step back to assess the impact of its aggressive tightening on inflation and the broader economy.

“If we are surprised on the upside, we are still prepared to be forceful. But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy,” Ms. Kozicki said, according to the prepared text of her speech.

The next rate decision on Jan. 25 will be based on incoming data, she said. Markets expect the bank to stand pat at 4.25 per cent next month.

“The largest shifts in spending have been in the most interest-sensitive areas, suggesting our monetary policy actions are working to rebalance supply and demand,” Ms. Kozicki said.

December 10, 2022
9:42 am
Loonie
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What a lot of gibberish!

In sum, "interest rate hikes if necessary but not necessarily interest rate hikes." It's wait-and-see, as always. This isn't really much different than before. They have not speculated that rates will fall, only that they might not rise next time.

December 10, 2022
11:03 am
HermanH
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savemoresaveoften said The Bank of Canada could pause interest rate hikes as early as next month as it shifts to a more “data-dependent” approach to monetary policy, although the bank is still prepared to be “forceful” if necessary, deputy governor Sharon Kozicki said on Thursday.

You mean that they weren't relying on data for their first seven increases?!

December 10, 2022
11:23 am
Dean
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HermanH said

savemoresaveoften said
The Bank of Canada could pause interest rate hikes as early as next month as it shifts to a more “data-dependent” approach to monetary policy, although the bank is still prepared to be “forceful” if necessary, deputy governor Sharon Kozicki said on Thursday.

You mean that they weren't relying on data for their first seven increases?!  

Guess not ... whoda thought ❗

LOL sf-laugh

    Dean

sf-cool " Live Long, Healthy ... And Prosper! " sf-cool

December 10, 2022
11:41 am
savemoresaveoften
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Loonie said
What a lot of gibberish!

In sum, "interest rate hikes if necessary but not necessarily interest rate hikes." It's wait-and-see, as always. This isn't really much different than before. They have not speculated that rates will fall, only that they might not rise next time.  

Actually they explicitly rule out rate cut based on that statement lol

December 10, 2022
1:54 pm
Bill
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I understand the shift, it's very different than before.

Up to now they said interest rates are going to go up, naturally they did that in stages rather than all at once, now done.

Now they going to see how the data comes in re. the effect of this year's increases, to determine if and when they need to adjust rates again - "the bank is preparing to step back to assess the impact of its aggressive tightening on inflation and the broader economy."

Clear shift, and makes perfect sense, most people get that it takes time to see the impact of monetary policies, so now it's time to stop turning the steering wheel and observe how we're doing before turning the wheel further, holding steady or (very unlikely, though nothing is explicitly ruled out) turning the wheel back.

Be interesting to see if the shift in message has an effect on long-term GIC rates, at least in the weeks until the next announcement.

December 10, 2022
2:24 pm
lifeonanisland
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Bill said
I understand the shift, it's very different than before.

Up to now they said interest rates are going to go up, naturally they did that in stages rather than all at once, now done.

Now they going to see how the data comes in re. the effect of this year's increases, to determine if and when they need to adjust rates again - "the bank is preparing to step back to assess the impact of its aggressive tightening on inflation and the broader economy."

Clear shift, and makes perfect sense, most people get that it takes time to see the impact of monetary policies, so now it's time to stop turning the steering wheel and observe how we're doing before turning the wheel further, holding steady or (very unlikely, though nothing is explicitly ruled out) turning the wheel back.

Be interesting to see if the shift in message has an effect on long-term GIC rates, at least in the weeks until the next announcement.  

Disagree. This is lip service. A PR exercise to sooth the chorus of dissent. As a subsidiary of the US, it seems obvious that we'll continue in lockstep with Powell and the Fed. Failure to do so will have many consequences, including cratering the CDN dollar. Rates go higher in the US (and other countries) and ours will follow suit. And it also seems more and more obvious that rates will remain at least at this level for some time to come, as noted by the IMF yesterday. Gun shy central banker types will be loath to speedily restore the good old days of flipping condos, FOMO speculation, and excessive liquidity.

December 10, 2022
3:27 pm
Loonie
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savemoresaveoften said

Actually they explicitly rule out rate cut based on that statement lol  

If you can figure out where they said that, you are definitely better at gibberish discernment than I!

December 10, 2022
4:54 pm
savemoresaveoften
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Loonie said

If you can figure out where they said that, you are definitely better at gibberish discernment than I!  

By not mentioning any reason why they may need to cut, that’s a clear signal….

Not sure how many participants here actually make a living watching global central bank statements obverse the past 30 years and act on it. My guess is not that many.

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