In a recent CIBC podcast, Paul Beaudry, the former deputy governor of the Bank of Canada, advocated for a half-percentage point cut to the overnight rate later this month. He argued that “when you want to turn things around, you want to get the confidence going.” Policy action of this scale could significantly boost confidence in the economic outlook among both households and businesses.
This view aligns with the Bank of Canada’s sentiment surveys, which indicate ongoing softness among both businesses and consumers. With inflation and wage expectations easing, the Bank can feel comfortable prioritizing a reduction in policy restrictiveness.
Considering the balance of risks, an undershoot in inflation appears increasingly likely in the context of a weakening economy. In September, Canadian consumer prices fell 0.4 per cent, bringing the annual inflation rate down to 1.6 per cent from 2.0 per cent the previous month. This is the first time inflation has fallen below the 2 per cent target since February 2021. The decline was primarily driven by weaker gasoline prices, which fell by 7.1 per cent, while inflation excluding gasoline remained steady at 2.2 per cent. Additionally, all core inflation measures were unchanged, with the median at 2.3 per cent and the trim and ex food & energy measures at 2.4 per cent.
Signs indicate that the housing components of inflation are finally beginning to ease. Mortgage interest costs decreased to 16.7 per cent from 18.8 per cent, and rent growth softened slightly to 8.2 per cent from 8.9 per cent. Inflation excluding shelter was only 0.4 per cent, largely driven by weaker energy prices.
However, employment data may be a concern for the Bank. In September, employment rose by 47,000, surpassing the median consensus estimate of 27,000. The unemployment rate fell by one percentage point to 6.5 per cent, marking the first decline since January.
Nevertheless, several flashing yellow lights emerged from the employment report. Notably, we saw the fourth largest monthly population gain ever recorded. The participation rate fell to 64.9 per cent, its lowest level since the late 1990s. Moreover, the estimated total hours worked fell 0.4 per cent month-over-month, which simply does not make sense given the increase in full-time jobs.
It’s a close call, but given that inflation is now below 2 per cent, the unemployment rate remains high, and consumer and business confidence is weak, the Bank of Canada is likely to opt for a 50 basis point rate cut later this month.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
To meet federal housing targets, a significant increase in construction activity is essential. The government’s recently announced measures to encourage the construction of secondary suites and unlock vacant land for housing development aim to further that goal. But it may not be as easy as it sounds. There are several complexities to navigate and many unanswered questions. Will these measures deliver the benefits the government hopes for?
Get our take in the latest Housing Affordability Watch: Encouraging More Secondary Suites – How Hard Could it Be?
Independent Opinion
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