We haven’t left the hostel, friends. Take a good look at your budgets, because inflation will remain too high for another two years.
The Bank of Canada does not say so, but that is what it explains, essentially, in its quarterly report, published at the same time as the increase in its key rate by 0.25 point, to 5%.
The Bank is careful not to say whether it will increase its rate further over the next few months. However, its governing board “remains concerned about the risk that progress towards the 2% inflation target could stagnate, which would jeopardize the restoration of price stability”… and therefore the possible reduction in the rate of inflation. interest.
Is inflation stagnant, really? Hasn’t the inflation rate fallen from a peak of 8.1% in June 2022 to 3.4% in May 2023?
Indeed, except that this sharp drop is explained by the fact that the massive price increases of spring 2022 are now no longer reflected in the calculation of the inflation rate over one year. The comparison becomes more advantageous.
Other reasons: falling gasoline prices and the gradual easing of global supply problems.
When the Bank talks about stagnation, it is talking about core inflation, which has been hovering for 8 months at around 3.5%-4%, far from the 2% target. Core inflation excludes goods and services with extreme variations, both up and down.
This inflation is about one percentage point higher than forecast by the Bank last January. One of the culprits: the price of services, therefore wage increases.
Canada is not alone in the boat. In the United States, core inflation is around 5%, a level that remains high even though the headline inflation rate fell to 3% in June.
In short, the 2% target will not be reached at the end of 2024 or the beginning of 2025, as predicted by the Bank of Canada, but two quarters later, in the middle of 2025… in two years.
Immigration and Housing
Normally, by gradually raising the key rate over the past 18 months – and therefore the interest rate chain – the Bank would have expected a more marked moderation in household consumption, and therefore in inflation. However, this was not really the case, at least not enough.
For what ? First, because the job market has remained vigorous, after all. Yes, the number of vacancies is decreasing, but unemployment remains low. Added to this are the accumulated savings of households and government budgetary measures.
Above all, the immigration boom in Canada has mixed the cards, adding to the strength of household spending, which the Bank points out.
Last year, Canada’s population grew by more than one million people and the pace is continuing this year. Such a volume has not been seen in Canada since 1949, when Newfoundland entered Confederation (then adding some 600,000 people to the Canadian population).
“It is undeniable that Canada’s immigration policy is having an impact. In particular, it creates a shock on the housing market,” said the National Bank’s chief economist, Stéfane Marion.
In this regard, the Bank notes that buyers have started to return to the resale housing market and that prices rose in May for the second month in a row.
“The increases, whether in resales or prices, were seen across the country and were more pronounced than anticipated in the January Report,” the Bank writes.
The phenomenon is particular, since mortgage rates have risen sharply for 18 months, causing the monthly payments of a new home buyer to jump by $500 or more, depending on the term chosen.1.
Faced with the situation, Desjardins Group’s economic department believes that the Bank could raise its key rate again at its next meeting, on September 6, “but we continue to believe that it will be the last for this cycle”.
The year 2024 will be difficult, according to Desjardins. GDP growth will be around 0.4%, much less than in 2023, which would reach 1.7%, all things considered.
2023, which started strong with a 3.1% annualized jump in the first quarter, is expected to end the year with a 0.1% decline in the last quarter2.
The economic department of the National Bank, for its part, does not foresee any growth in 2024 (0%). Chief economist Stéfane Marion believes that the key rate could start to come down in the first quarter of 2024, after an economically difficult start to the year.
He believes that the Bank of Canada does not sufficiently take into account the deterioration of corporate profits in its analyses, which have repercussions on the labor market.
In its forecasts, precisely, the Bank of Canada is far from being as pessimistic as the National or Desjardins, seeing the economy grow by 1.5% in 2024.
At least Canadians can take comfort in thinking of Europeans, whose inflation is higher and the economy more shaky.
1. Our calculation is based on a mortgage loan of $350,000 and a 5-year rate that has increased by 2.5 percentage points. The increase in monthly payments could reach $1,000 with the one-year term, whose rates have increased further.
2. Annualized GDP growth should be around 1.5% in the 2e quarter of 2023, then 0.4% in the 3e quarter.