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Interest Rate vs Inflation: When Can We Expect a Rate Cut?

We had a surprise drop in the September inflation rate to 3.8%.


Were you expecting to see a downward trend?


The October inflation rate was just announced earlier this week.


And it is now down to 3.1%.



Before we dive into the details of the 3.1%, let’s take a look at the relationship between the interest rate and inflation from the start of 2018.


The relationship between the annual inflation rate and the Bank of Canada's interest rate from 2018 to 2023

In the middle of 2018, the inflation rate climbed up to 3%.


The Bank of Canada responded with a couple rate hikes and they were enough to bring inflation back down to around the 2% mark.


And the interest rate was still below 2%.


Then Covid hit and the interest rate dropped to almost 0 to stimulate the economy.


That was the time when money was really really cheap.


Together with significant money printing and people having extra savings, the economy was actually over-stimulated and inflation shot way up.


We were starting 2022 with a 5% inflation.


As you can see, the Bank of Canada started responding with interest rate hikes.


But it would take time for the overall economy to reflect the impact of the rate hikes.


And we all witnessed the historic high inflation rate of 8.2%, a 40-year high.


Inflation started coming back down this year, but the Bank of Canada decided to push it further with a few more rate hikes.


As of now, we are sitting at a 5% interest rate and a 3.1% inflation rate.


What’s next?


Let’s take a look at why inflation dropped to 3.1%.


The main reason was a big 6.4% drop in gasoline prices.


Food prices increased 5.4% over the past year.


While it is still high, it is increasing at a slower pace.


I always talk about mortgage costs and rent being a big part of the inflation equation and it is counter intuitive to keep raising the interest rate.


So what if we take out mortgage interest cost from the inflation equation?


We would be seeing an inflation of 2.2%.


How about we take out shelter completely?


That includes rent, utilities, maintenance, mortgage interest, property taxes and so on.


We would only see 1.9% inflation.


Looking at these numbers, does it make any sense to you to keep raising the interest rate to lower that inflation rate?


The markets widely believe that the Bank of Canada is done for the rate hikes.


The speculations are rather on when the Bank would start lowering the interest rate.


Do you think there’s any chance for us to see a rate cut in the first half of 2024?


It would be very interesting to see how the real estate market reacts once we start seeing rate cuts.


Are we going to see suppressed housing demand unleashed?


Similar to what we saw coming out of the frozen Covid market?


Comment below and let me know your thoughts.


In the meantime, the federal government announced a Canadian Mortgage Charter earlier this week in the economic update.


It is meant to support people who are struggling with the high mortgage rates.


Under the charter, mortgage holders at risk of losing their homes could be allowed temporary extensions of the lengths of their mortgages.


Fees and costs attached to mortgage relief measures would be waived.


And homeowners at risk would be allowed to make lump sum payments and sell their principal residences without any prepayment penalties.


In terms of mortgage renewals, the stress test will be removed, doesn’t matter whether you’re sticking with your lender or switching to a new one for better rates.


So you just need to qualify for the current mortgage rate, no need to add 2% on top.


This is going to make lenders stay competitive on their rates because people can now shop around for better rates.


But is this going to change the big picture a whole lot?


I don’t think so.


The real estate market will most likely stay frozen going into 2024 and I don’t expect to see any dramatic changes until we see that first rate cut.


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