With the release of the November inflation data, some were disappointed that inflation remained at 3.4% year-over-year—the same as in October.
However, without the base effects of year-ago energy price declines, inflation would have been less than 3%.
December’s inflation data will be similarly skewed higher. Still, there is ample reason to suggest that interest rates have peaked, and the Bank of Canada will begin to ease monetary policy next year.
The economy has slowed significantly, and the unemployment rate is rising. Consumer spending will continue to slow as monthly mortgage payments rise at renewal. Excess demand is now gone, and housing markets have slowed considerably. Although the road to 2% inflation will be bumpy, the central bank now believes that the overnight policy rate is high enough to return inflation to its target.
Core inflation has been sticky, and wages continue to rise, playing catch-up to past inflation, but events are trending in the right direction. While not even the Governing Council knows when they will begin to cut interest rates or how quickly the process will proceed, policymakers and regulators are worried about the dampening effects of significant increases in monthly mortgage payments for the 60% of loans that will be renewed or refinanced in the next three years.
Just as overstaying their aggressive easing of monetary policy caused inflation, on the flip side, keeping monetary policy this tight for too long could damage the livelihoods of many Canadians, triggering potential financial instability and significant layoffs. These concerns have precipitated a dramatic decline in market-driven interest rates worldwide.
There are many reasons to believe the Bank of Canada will begin to ease monetary policy in 2024. Bond and money markets are building in this expectation
Dr. Sherry Cooper Chief Economist, Dominion Lending Centres
Dr. Cooper is Chief Economist of Dominion Lending Centres. Canada’s leading mortgage and leasing company with more than 3,700 members offering free expert advice across Canada. In this role, Sherry helps Canadians understand the issues surrounding their most important financial decision – buying a home.
Dr. Cooper has an M.A. and Ph.D. in Economics from the University of Pittsburgh. She began her career at the Federal Reserve Board in Washington, D.C. where she worked very closely with then-Chairman, Paul Volcker and subsequently joined the Federal National Mortgage Association (Fannie Mae) as Director of Financial Economics.