Statistics Canada released their March 2023 consumer price index (CPI) numbers this week, revealing that inflation has slowed to 4.30% from 5.20% in February and 5.90% in January.

With rates paused for the time being the key question now is how will the Bank of Canada react to the data and are more rate hikes coming or will they stay at this level for a while before an eventual reversal.

Let’s take a look at what these latest numbers mean for the mortgage market.

How high is current inflation in Canada?

Canadians have been hard hit by inflation since 2022, with the cost of living skyrocketing above the 2.00% inflation rate that is targeted by the Bank of Canada. You’ve likely noticed that your grocery bill has been a lot higher recently and that’s no surprise with food prices up 9.70% year over year in March. While this number is down from 10.60% in February it’s clear that there’s still a lot of room to go in bringing inflation down to palatable levels for Canadians. Service costs also remained high, increasing 5.1% year over year. At the same time some parts of the consumer price basket fell in value, with gas prices currently cheaper than they were this time last year. The CPI is an accurate indicator of overall inflation but is still only a sum of its parts.

Sitting at 4.3% the current rate of inflation is definitely putting strain on the budget of already struggling Canadians. At the same time this data has been hitting the economy has hard as expected with Canadians spending more than ever and the 

How will the Bank of Canada react to inflation?

The Bank of Canada’s goal is to keep inflation at their target of 2.00%, and their main tool for the job is the policy interest rate. When the Bank of Canada raises interest rates, it’s more expensive to borrow money which leads to less borrowing and therefore less spending. 

When interest rates are high people are incentivized to save money in return for a higher interest rate and to borrow less due to increased costs. This decrease in spending reduces the demand for goods and puts a downwards pressure on prices, helping to ease inflation. When inflation is low however, the Bank of Canada can lower rates in order to stimulate the economy and encourage the flow of money. Low interest rates are good for business as it becomes easier to borrow capital.

While it might seem simple to combat inflation on paper (rates go up, costs go down) in practice the Bank of Canada has to play a very delicate game in order to avoid an economic crash. If the Bank of Canada raises rates too high or too fast, they could trigger a recession as the economy reacts to suddenly decreased demand. This will mean that businesses’ profits plummet and they are forced to lay-off workers. 

“We’re trying to balance the risks of over- and under-tightening monetary policy. If we don’t raise interest rates enough, Canadians will continue to endure high inflation, and high inflation will become entrenched, requiring much higher interest rates and a sharper slowing in the economy to restore price stability. If we raise interest rates too much, the economy will slow more than it needs to, unemployment will rise considerably, and inflation will undershoot our target.” said Governor Tiff Macklem last November, highlighting the difficult decisions faced by the Bank of Canada.

The unemployment rate in Canada remains strong for the time being, at 5.00%, however the Bank of Canada is actually looking for this number to go up as an indicator that their interest rate hikes are having the intended effect. While aiming to increase unemployment has seen criticism from some, it’s seemingly inevitable at this point that the economy will have to face a downturn in order to bring inflation back down to reasonable levels.

With that being said, the latest DPI data is optimistic, hinting that the current policy interest rate of 4.50% might be enough to bring inflation under control. With inflation slowing each month it’s becoming increasingly likely that the Bank of Canada won’t see the need to increase rates further, however the question remains: how long will they stay this high?

As of the latest economic data in April our analysts are predicting that rates may begin to come down sooner than expected. Here’s a look at our latest 5 year mortgage rate forecast:

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