Canada’s annual rate of inflation edged up in December, muddling the expectation that interest rate cuts were on the horizon.

According to Statistics Canada’s latest Consumer Price Index, inflation rose 3.4% year-over-year in December, up from 3.1% in November.

The acceleration in headline inflation was largely attributable to higher gasoline prices, which edged up 1.4% annually due to a base-year effect, but shelter prices offered a significant boost, rising 6.0% year-over-year.

Mortgage interest costs increased 28.6% annually, while rent prices rose 7.7% year-over-year as the high interest rate environment continued to stand in the way of homeownership. The latter’s increase comes on the heels of a 7.4% jump in November.

The Bank of Canada’s preferred measures of core inflation, CPI trim and CPI median, proved stubborn, too. The former accelerated 3.7% annually in December, up from 3.5% in November, while the latter stayed stuck at 3.6%. On a three-month annualized basis, both measures averaged an increase of 0.7%, with trim reaching 3.8% and median hitting 3.5%.

While December’s print was relatively in-line with economist’s predictions, the unexpected strength of core inflationary measures was cause for concern. With inflation pulling further away from the BoC’s 2% target, the consensus of a springtime interest rate cut began to crack.

Spring Cut? Not So Fast

"The Bank of Canada’s job is getting inflation under control. When there’s a setback like this, that should realistically postpone any possibility of a rate cut. But there are also many, many other signs pointing to the fact that Canada’s economy is slowing," Ron Butler, a Toronto mortgage broker and real estate commentator, told STOREYS.

"Everybody who was putting their hand up for April cuts was obviously wrong. Just sit down. The Bank of Canada will cut interest rates eventually, but it won’t be until July or the fall. When rates go up, they go up in an elevator. But when they come down, it’s one step at a time, like stairs. Historically, they won’t reduce by any more than a quarter percentage at one time."

The forecast was shared by Derek Holt, Vice President and Head of Capital Markets Economics at Scotiabank, who noted that notions of a March rate cut have been "mostly wiped out," while inklings for April flattened further.

An "awful lot has to go right" for the BoC to be in cutting-mode by mid-year, or even at all in 2024, Holt said in an economic update. That includes a deceleration of the CPI trim and CPI median, which is unlikely to be achieved "any time soon."

From left to right: Derek Holt, Douglas Porter, Randall Bartlett, and Leslie Preston.

While Douglas Porter, Chief Economist and Managing Director Economics at BMO, maintained his stance for a June rate cut — which had previously been regarded as cautious — he agreed that the persistence of core inflation was "unsettling news." To Randall Bartlett, Senior Director of Canadian Economics at Desjardins, the stickiness indicates that "we’re certainly not out of the woods yet." But we may be nearing a clearing.

"When you look under the hood, inflation was quite a bit stronger than most folks had anticipated. There's a way to go before the Bank of Canada is able to wrestle inflation down to their 2% target. But we think it will be able to do so, broadly speaking, by the end of the year," Bartlett told STOREYS.

"So, we do think that the Bank of Canada will be able to begin cutting interest rates before the middle of the year, probably at the April meeting."

Leslie Preston, Managing Director at TD Economics, predicted the same, expecting inflation and the economy to have both "cooled sufficiently" in time for an April rate cut.

Bartlett, meanwhile, points to the BoC’s latest Business Outlook Survey and Survey of Consumer Expectations, which both indicate that expectations for future inflation and economic growth have lowered, as supporting evidence. And Desjardins’ data has real GDP growth in Q4 2023 tracking at roughly half the pace set out in the BoC’s most recent forecast.

But cuts won’t be "overly aggressive," coming out to 50 basis points (bps) in April, and a further 50 bps per quarter for the rest of the year.

Whenever the BoC does decide to cut interest rates, though, there remains a "big risk" that sidelined buyers seize the moment and rush back to the market in droves.

"We know that there's still a lot of pent up demand for housing out there, and it continues to increase as a function of rising rents and strong population growth," Bartlett said. "It’s rates that are really holding back a lot of that."

"So, certainly, we think once rates come down we will start to see people piling back into the housing market. We don't think it's going to take off like what we saw during the pandemic, but it is going to lead to ongoing strength in the housing market. You’re going to have this interesting effect where home prices remain elevated and start to increase at a time when rates are still high…it’s going to be a challenge for affordability going forward, even as rates come down."