Statistics Canada released its latest inflation print on Tuesday morning, and Desjardins Economist Randall Bartlett is calling it a “turning point” for interest rates and an indication that better days are ahead for the housing market.
But first things first, the data: Consumer Price Index came down from 2.5% (year over year) in July to 2% in August, according to StatCan’s data. The national agency attributed the deceleration, in large part, to lower prices for gasoline (down 5.1% year over year). As has been the case since December 2022, mortgage interest costs (up 18.8% year over year) and rent (up 8.9% year over year) remained the largest contributors to headline CPI.
The decline in headline CPI is a big deal for a few reasons; last month’s print is the lowest the metric has been since February 2021, and it’s also right in line with the Bank of Canada’s 2% target for inflation.
“Since the last Bank of Canada meeting, we've been starting to hedge our language a little bit as we saw economic data coming in weaker than expected. And ultimately, the CPI print today coming in below expectations really helped to solidify our view that it really is time for the Bank of Canada to take its foot off the brake, if you will, a little bit a little bit faster than than it has been, and ease up on monetary policy a little bit more quickly,” Bartlett tells STOREYS.
In more certain terms, Bartlett says that Desjardins is now anticipating a rate cut of 50 basis points at the next BoC meeting, scheduled for October 23. This is iterated in a report put out by Desjardins earlier today, which also speculates that the central bank will return to its “gradual pace of 25-bps rate cuts” at the subsequent meeting in December, while “keeping the option open to accelerating the pace of cuts if warranted by economic conditions.”
Of course, nothing is set in stone, Bartlett notes. “The one thing that could maybe turn the tide a little bit would be something along the lines of inflation re-accelerating in September, and that data comes out before the next monetary policy report. But if we look at data so far in the month of September — at least, the data we have access to at a high frequency basis — that doesn't look to be the case. It looks like we're going to see sustained slowing in inflation in the month of September.”
“We also look at where economic activity is coming in relative to the Bank's most recent forecast, and it's coming in much weaker,” he adds. “The Bank was forecasting 2.8% annualized growth in the third quarter of this year. We're tracking closer to 1%.”
The degree of softening in Canada's economic picture is certainly not lost on BoC Governing Council. At the press conference following the last rate announcement on September 4 — it resulted in another quarter-point cut, bringing the policy rate down to 4.25% — Macklem’s tone was unmistakably dovish, and he spoke of “excess supply” in the economy. Although he was careful not to give any hints on what October’s rate announcement might bring, economists with Canada’s ‘Big Five’ banks are largely in agreement that the remaining announcements scheduled for 2024 will see the policy rate slashed further based on both Macklem’s tone and recent economic data releases.
Bartlett underscores that this will spell good things for Canadian housing, as mentioned, which has yet to pick up nationally and at local levels even though the central bank is now three rate cuts in. “Our outlook is for the housing market in Canada to grind gradually higher going forward,” he says. “Obviously, we saw a weakness in the resale numbers in the month of August, and in housing starts relative to where we've been, but we’re expecting sales activity to go higher going forward. We’re broadly expecting the same on the price side as well.”
