rates
02. rates Interest rates are now higher than inflation, which has been a relatively rare phenomenon over the past decade. The big question now is when the Bank of Canada will make money cheaper again.
IS THE ROLLER COASTER RIDE ALMOST OVER?
Headline inflation has, for the most part, been declining for a year now. After peaking in June 2022 at 8.1%, inflation came all the way back to the Bank of Canada’s target range in June 2023, before increasing back out and is sitting at 4.0% most recently for August. The unparalleled rate tightening cycle from the Bank of Canada since last March has had its effect on slowing spending (including in real estate) and reducing demand-side price pressures. Along with that, supply chains have improved, global energy prices have declined, and Ukraine is exporting once again which has eased commodity prices, particularly in grain. Bond yields, meanwhile, have been increasing in 2023 and (as we discussed earlier) have been increasingly volatile. This has led to higher fixed mortgage rates, as they’re based on those increasing bond yields. Further, the
spread between the risk-free Government of Canada bond yield and fixed mortgage rates has grown as the perceived risk to lenders mortgage books has also grown. So where do we go from here? Well, the path all the way back to 2% inflation is tricky in the short-term, (and we’ll explore in greater detail in the next section). The Bank of Canada continues to warn Canadians that it will raise rates further if needed, though it’s the opinion of your authors that they ultimately won’t go beyond the current 5% policy rate, which is at its highest level in more than two decades. Instead, they will likely hold for the time being, and let the effects of past increases continue to work their way through the economy. Look for the first rate cut to come from the Bank of Canada sometime in early 2024.
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