Market Insight for September 20

Statistics Canada released its latest inflation report on Tuesday, and they are calling it a “turning point” for interest rates and an indication that better days are ahead for the housing market.

The Consumer Price Index (CPI) data highlights a key shift in inflationary pressures in August, as inflation cooled from 2.5% in July to 2%. The primary factor driving this decline, according to Statistics Canada, was the significant drop in gasoline prices, which fell by 5.1% year over year. This helped ease overall price pressures in the economy.

However, persistent increases in housing-related costs continue to weigh on consumers. Mortgage interest costs saw an 18.8% year-over-year increase, while rent climbed 8.9%, continuing their role as major contributors to inflation since December 2022. Despite the decline in gasoline prices, elevated housing costs remain a concern for many Canadians.

CIBC predicts the Bank of Canada (BoC) will push for more aggressive rate cuts, and Canadians could see a significant drop as soon as December.

In June, the Bank dropped the interest rate from a longstanding 5% to 4.75%. That move was the first in more than four years, following six rate holds. Another quarter-point cut followed in July, bringing the rate to 4.5%. Then, in September, the BoC cut the key interest rate to 4.25%.

CIBC economists and other industry experts expect a quarter-point cut in October.

In its Economics Forecast report published on September 12, CIBC predicts that something more aggressive will occur within less than five months — two half-point cuts in December and January.

This means we could potentially see the rate drop to 3% in January.

That’s in contrast to a prior forecast that had rates easing at 25 basis points at a time, and we no longer expect any pauses on the path to less restrictive rates, said in the report.

“When inflation is somewhat troubling, and interest rates are already moderate, you need a lot of economic pain to induce a major drop in interest rates,” Shenfeld added. “But with inflation soon to be vanquished and real interest rates still at restrictive levels, there’s no logical reason for central bankers to move too cautiously to provide relief.”

Shenfeld said both Canada and the USA are also experiencing softening job markets, and “cutting rates materially is really a no-brainer.”

The report further noted that a more accelerated cut would help Canada stay out of a recession as the country’s labour market has shown weakness.

The cuts would impact housing and other “interest-sensitive sectors,” but the full effect likely wouldn’t be seen until 2026. Canada still faces the challenges of upcoming mortgage renewals in the next two years and the drag from greater household sector indebtedness.