Analysis and Economic Update

The Bank of Canada (BoC) decreased their prime lending rate 0.50% at the end of October from 4.25% to 3.75%. This jumbo rate cut was expected and we have now seen 4 consecutive rate cuts since June, although October’s was the largest.

Inflation

• The inflation outlook declined significantly from 2.7% in June to 1.6% in September. October’s inflation report will be released on November 19th.
• Inflation in shelter costs (mortgage interest and rent) remains elevated but has begun to ease. Please note that shelter costs are directly related to the BoC’s interest rate because the higher the rate, the higher mortgage interest costs).
• Excess supply in the economy has reduced inflation in the price of many goods and services.
• The drop in global oil prices has led to lower gas prices at the pump.

All of these factors have combined to bring inflation down.

In last month’s announcement, the Bank said that with inflation now back around it’s 2% target, it decided to reduce the policy rate by 50 basis points to support economic growth and keep inflation close to the middle of it’s 1% to 3% target range.

It went on to note that “if the economy evolves broadly in line with our latest forecast, we expect to reduce the policy rate further.” However, it also cautioned that the timing and pace of further reductions will be guided by incoming information and the implications of that information for the inflation outlook.

Ultimately, the Bank said it will take decisions “one meeting at a time.” And added that it is committed to maintaining price stability for Canadians by keeping inflation close to its 2% target.

However, it’s important to note that the overnight rate is still 145 bps above the current core CPI inflation. The average for the past 30 years is just 60 basis points… 

What this means is that we expect the overnight rate, if core inflation stays at 1.6% (which it’s currently dropping), to be at around 2.2%. This means we have an additional 1.25%+ to go in the overnight rate.

Long story short, we expect to see the BoC overnight rate at 2.5% by next spring.

Next Up: The Bank is scheduled to make one more rate decision in 2024 on December 11th.