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Inflation in Canada fell to 2.9 percent in January, but will this prompt the Bank of Canada to cut interest rates sooner than expected?

Among leading economists, opinion remains divided. 


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“Clearly today’s result makes rate cuts much more plausible in coming months, and we remain comfortable with our call that the (Bank of Canada) will begin trimming in June,” said Bank of Montreal chief economist Douglas Porter.


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“There is little debate on this one — it’s a much milder reading than expected,” said Porter.

Bank of Canada looking for a trend

On the other hand, Scotiabank’s Derek Holt urges caution. 

“The Bank of Canada is searching for a more convincing trend. One month doesn’t cut it.”

“It’s just one month, folks,” wrote Holt. “Chill. That’s the line I would expect the Bank of Canada to apply here and perhaps by repeating their prior references to taking the ‘ups and downs’ of the measures in stride as one of their Deputy Governors once put it.”

The 2.9 percent inflation rate for January was well below expectations. Many economists predicted it would be  3.3 percent following December’s 3.4 figure. 


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Canadian energy costs were lower

It’s the first time the Consumer Price Index (CPI) reading has dropped below 3 percent since June’s 2023 2.8 percent reading.

The drop was mainly due to lower energy prices (a 4 percent annual decline in gas prices) and a fall in grocery prices, which came in at 3.4 percent in January compared to 4.7 percent in December.

For newcomers arriving in Canada soon or those who have already landed, the cost of living numbers plays a role in where they decide to settle. Housing, food and transportation costs are critical determinants in choosing where to live.

Canadian immigration remains robust. In November, Immigration Minister Marc Miller announced that Canada still plans to settle 485,000 newcomers in 2024 and 500,000 in 2025.

April rate cut is unlikely

Many newcomers also come to Canada eager to purchase a home, and those plans are affected by the interest rate and its impact on mortgage rates. 

Bank of Canada officials have frequently stated that the Bank does not plan to cut interest rates until inflation appears to be “sustainably” close to the Bank’s target of two percent. 

And while the Bank could begin cutting the overnight night interest rate (which currently sits at five percent) on March 6, the earliest cut would come in April, but most likely later, according to most economists.

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No cut in the rate until mid-2024

To bring inflation under control, the BoC has hiked interest rates ten times since March 2022. It’s part of a strategy to make it more expensive to borrow money, which will make consumers and businesses spend less, thus forcing down prices and slowing the economy.

Inflation rose to  8.1 percent in June 2022 but since then has shown a steady downward trend.

Pedro Antunes, the chief economist at the Conference Board of Canada, said that he and his colleagues believe the BoC will likely wait until mid-2024 before it begins cutting the rate, despite January’s surprise drop in inflation.

“I think unless the economy really takes a real dive, they’re not going to change their timing.”

Rate hikes blamed for higher housing costs

David Macdonald, an economist with the Canadian Centre for Policy Alternatives, argues that rate cuts should have already started.

Macdonald believes that the Bank’s rate hikes make inflation worse, either through mortgage rate increases or through landlords increasing rents to help cover their mortgage costs.

“We’re at a point now where shelter is the biggest single driver of inflation.”

Housing costs continue to exert the most pressure on inflation. They rose in January to 6.2 percent from 6 percent in December.

Asking rents reached a record high

The mortgage interest cost component of the Consumer Price Index calculation is now up 27.4 percent year-over-year.

According to the most recent National Rent Report from Rentals.ca and Urbanation, asking rents for all residential property types in Canada reached another record high in January 2024, up 10.0 percent year-over-year to an average of $2,196. 

Rents in January also rose 0.8 percent from December, pushing the annual rent growth rate to a four-month high.

TD economist Leslie Preston says that housing “inflation has become the biggest hurdle preventing the Bank from cutting interest rates.”

Inflation numbers good news for homeowners

Writing in the Globe and Mail, Erica Alini says that January’s  lower-than-expected inflation reading from Statistics Canada is “welcome news for both variable-rate mortgage holders and anyone thinking about signing up for a new fixed-rate mortgage.”

Alini adds that if the inflation numbers prompt the Bank of Canada to cut the interest rate, “variable-mortgage-rate holders have only a few more months to go before they’ll see their mortgage interest costs decline.”

Also, borrowers with adjustable payments will see their mortgage installments shrink as their rate decreases with the Bank of Canada’s key rate. 

Those with fixed mortgage payments writes Alini, will see more of their money reducing their mortgage balance rather than paying off the interest on their loans.

Steve Tustin is the Editor for Rentals for Newcomers and contributing editor for Prepare for Canada. He is the former managing editor of Storeys.com and a former senior editor at both the Globe and Mail and the Toronto Star.

*Prepare for Canada used no AI-generated content in the writing of this story, and all sources are cited and credited where possible.

© Prepare for Canada 2023