Unless you have been living under a rock for the last 2.5 years you are likely aware that interest rates have soared from their pandemic lows. These increases have been done by the Bank of Canada and their fearless leader Tiff Macklem in an effort to curb inflation within range. The Bank of Canada targets inflation between 1-3% but realistically it wants it at 2%.
Why does it target 2%? Well it’s a number of economic factors but in part it is to help businesses grow while ideally passing on cost of living adjustments to its workers so that wages can rise at the same pace. Has this happened? No, which is why many people feel like they are getting poorer every year as inflation soared to nearly 9% while wage growth has been minimal.
Now that being said, when Tiff appeared in front of the finance committee this week it made a comment suggesting that inflation may not have to hit 2% before interest rates start getting cut. What were his reasons:
1) Affordability & Real Estate – Basically if people can’t afford to buy – they won’t. This statement is obvious but is of significance given how much the Canadian economy is tied to a strong housing market
2) Government Spending – Current government spending may not be inflationary but future spending plans (insert: remember we have an election coming up) could change that. In previous newsletters I have talked about how government policy has limited the effectiveness of the rate increases.
3) Rising bond yields – We have seen a slight lowering recently but North American government borrowing has contributed to higher yields which increases fixed interest rate products and therefore indirectly Canadian borrowers. We see this more immediately in mortgage renewals.
Was some of his talk a response to a recent RBC report which warned of payment shocks for Canadians on a variable mortgage? Perhaps. As mentioned in his announcement last month, that uncertainty in global events and various economics makes predicting future interest rates.
Do I think we see an interest rate cut in December? No
Do I think we see an interest rate cut next year? Yes.
When I am guessing that the first interest rate cut will be? Later in Q3 2024 (if it was sooner believe me my wife would be happy)
I will be honest I hate writing about speculative things as I prefer to focus on facts but my thought process is that with all the mortgage renewals coming through that disposable income will drastically be reduced. With drastically reduced disposable income my thought process is that demand-driven inflation will normalize and therefore, supply chains can catch up and get us to more of a balanced market.
