In November, Canada’s inflation rate remained unchanged from October at 3.1%, as reported by Statistics Canada. This is higher than the 2.9% anticipated by economists, and still higher than the Bank of Canada’s target of 2%. It is possible that this may delay the timing of when the Bank of Canada makes it’s first rate drop in 2024.

Expert Opinions

Craig Alexander, president of Alexander Economic Views and former chief economist at TD Bank, is quoted by BNN Bloomberg the latest inflation reading “a bit of a disappointment” that may keep the Bank of Canada on the sidelines for longer. While he believes that rate hikes are now off the table for the Bank of Canada, the big question is now about when the bank will begin lowering its policy rate.

On a television interview Tuesday Alexander explained that “what we’re really debating about is when will central banks cut rates. I think that the Bank of Canada will want to see real definitive evidence that core inflation is heading down to the two per cent mark before they actually start to really provide any real interest rate relief.”

Meanwhile TD’s chief economist Beata Caranci suggested that these figures are in line with the “stickiness of inflation: that the Bank of Canada’s Governor Tiff Macklem has been warning us about.

Normally when the media speaks of inflation it is the headline CPI Core or Consumer Price Index Core inflation that is discussed. However, the Bank of Canada really likes to look at two subset measures called CPI trim and CPI median. While both of those are also high on their annualized measures, when you zero in on the three-month annualized pace, theu hsve fallen to 2.3% and 2.6% respectively. This should give some hope and some positive data to inform the Bank of Canada over the coming months and according to TD Economics suggests that the year-on-year pace of inflation is heading lower.

Impact of Shelter Costs on Inflation

Often missed is the fact that mortgage interest is now one of the main components to inflation! The Stats Canada report tells us that mortgage interest expense is up 29.8% year over year! Craig Alexander calculated that if we remove the impact of shelter costs, specifically mortgage rates, that the inflation rate is actually only 2.2%. The question is whether or not the Bank of Canada will see through it’s own impact on inflation!

The Bank of Canada raised it’s rate from 0.25% in early 2022 all the way to 5% by mid 2023. At the same time the bank was reversing it’s early bond buying program from the beginning of the pandemic to let the market start to dictate fixed interest rates. Without the bank interfering in the bond rates, we saw the bond yields, which tightly correspond to fixed mortgage rates, increase significantly along with the Bank of Canada’s own rate increases.

Rate Cut Timelines

TD Bank is forecasting the first Bank of Canada rate cut in April 2024 and expects a total of 1.5% in decrease by December 2024. This is more than what the markets are expecting, and TD Bank has consistently forecast a faster decline in the rates than the other major economists.

Caranci said that “the economy has weakened quite substantially in Canada, and that should mean that the inflation numbers are going to have to break below that three per cent level as that excess supply continues to build up in the economy.”

Meanwhile Tu Nguyen, economist with accounting and consultancy firm RSM Canada, wrote in an email to BNN Bloomberg that he also expects the bank to begin it’s rate cuts in the second quarter of 2024, but forecasts only a 1% total decrease by year end and further cuts to the rate in 2025 with an expectation that the “new normal” rate will settle about 3% – or 2% lower than it is today.

A 2% drop in rates would bring variable rate mortgage pricing down to about 4.2% instead of above 6% that we see today.

Craig Alexander (also quoted above) said that he expects the rate cuts will begin in the summer months, rather than in the spring.

And all of this is dependent on how our economy performs over the coming months! If there is anything we know, it is that predicting the economy is very difficult, and forecasts frequently need adjusting as new information becomes available and new behaviour is observed by economists.

In the end, the Inflation Report indicates a complex economic landscape in Canada, with steady inflation rates prompting a cautious approach from the Bank of Canada. Experts suggest a likely shift in monetary policy in 2024, but the exact trajectory remains dependent on future economic indicators.