The Canadian economy is showing continued signs of slowing as inflation decelerates. This opens the door for a continued pause in rate hikes. Indeed, with any luck, the Bank might have finished its tightening cycle.
One more rate hike is possible, especially if continued Middle East tensions lead to a sustained oil price increase, but the odds are against it.
This does not suggest, however, that interest rates will decline anytime soon. Headline inflation in September was posted at a 3.8% year-over-year pace, well above the Bank’s 2% target. Wage inflation remains at roughly 5%, and inflation expectations remain high.
However, the economy is slowing, and excess demand in labour markets is waning. Third-quarter economic growth is likely to be less than 0.5%, and leading economic indicators are pointing to a further slowdown in the final quarter of this year and the first quarter of 2024.
Canadian consumers, weighed down by record debt loads and high prices, are tightening their purse strings. Savings rates have fallen, and retail sales per capita have slowed markedly. Sales were down in six subsectors: car dealers, furniture, electronics, and appliance retailers.
Canadians are quickly rolling back their purchases of goods as more households face mortgage payment renewals. The Bank of Canada consumer survey suggested that families expect more adverse effects ahead as an increasing volume of mortgages come due for renewal or refinancing.
Businesses are also tightening their belts as the recent Bank of Canada Business Outlook survey showed considerable weakness. The Bank is counting on softening demand to translate into a slower inflation rate in the coming months.
I expect the central bank to cut interest rates in mid-2024, gradually taking the overnight policy rate down. In the meantime, housing markets will continue seeing a surge in new listings and more favourable buying opportunities.