Are we there yet?

Are rate cuts finally coming to help ease the affordability crunch?
The Lede

GVR Economics


April 16, 2024

Statistics Canada recently published the latest Consumer Price Inflation (CPI) data, and there was some welcome news contained within it worth writing a short post about.

To kick off the conversation, here’s a plot of the latest CPI data, including a few of the Bank of Canada’s (BoC) preferred measures of “core inflation”, against the “target range” (i.e. the range the BoC is aiming for).

Despite a very minor uptick in the headline CPI number for March, this measure is now sitting inside the BoC’s target range.

Looking at the BoC’s preferred measures of core inflation (i.e. CPI Trim and CPI Median), we can see they have been trending steadily downward, with CPI Median now sitting inside the top of the target range.

If you’re a central banker with a vengeance for inflation, this is pretty good news! You’re winning the battle!

And if you’re someone with a variable rate mortgage, or someone shopping for a mortgage, these trends are also good news as it signals we may be nearing a point where the BoC may begin reducing the policy rate, which should bring down borrowing costs, albeit somewhat modestly.

Forward expectations

Last year, we wrote a short post that talked about the thought processes that guide the BoC’s decisions surrounding changes to the policy rate, so we won’t repeat that here.

But what’s changed since that previous post however, is that we’re no longer asking the question of whether the BoC will pause hiking the policy rate; we’re now examining the possibility of when, and by how much, the BoC may cut the policy rate.

And while this is always a difficult question to answer since it hinges on a multitude of unpredictable factors, thankfully, there are always people willing to make (silly, but substantial) monetary bets on the future.

So, it’s usually worth taking a look at where these folks are placing their betting chips.

Here’s a plot of the projected future path of the BoC policy rate, based on big-money bets investors are making in financial markets.

The takeaway

When we published our latest residential forecast back in January, the big-money bets were expecting a lot more cuts to the policy rate than they seem to be pricing in now.

So, it’s worth pointing out that just because people are willing to lay it all on black (or red), doesn’t mean they’ll always be right. And so we should always take these kinds of predictions with more than a few grains of salt.

With that said, the BoC takes into account many factors when deciding to adjust the policy rate.

And when we look across all of the various economic data the BoC regularly looks at, there’s an increasingly clear picture that the path for the policy rate going forward is downward.

The first cut to the policy rate may come at the BoC’s June 7 announcement, with the market pricing in a 0.25 per cent reduction, which admittedly isn’t going to move the needle on affordability by a great degree.

However, if/when this first cut does come, it will mark a major shift in how the BoC is managing their mandate to keep inflation low and stable, while also trying to balance this with ensuring the economy is functioning as well as it can.

And this shift may signal that the BoC is finally ready to loosen up monetary policy from the most restrictive level we’ve seen in decades.