Inflation in Canada has reached the coveted two per cent annual rate, marking positive economic news for the country. Wage hikes have been outpacing inflation for the past 19 months, leading to a sense of relief for many Canadians. The Bank of Canada has already implemented three rate cuts as part of an easing cycle, with the aim of stabilizing the economy. Finance Minister Chrystia Freeland and RBC assistant chief economist Nathan Janzen have both praised the recent developments, highlighting the return of price stability and the unwinding of the Bank of Canada’s tightening cycle. However, Janzen also warns that the focus on inflation and rate cuts may overshadow the economic challenges that still lie ahead for Canadians.
When inflation deviates from the target of two per cent set by the Bank of Canada, the central bank responds by adjusting its policy rate. Higher interest rates lead to increased borrowing costs for individuals, businesses, and governments, which in turn can slow down economic activity. Recent data shows that consumer spending and business investment have decreased, and Canada’s economic output is below trend. Despite the rate cuts, the policy rate is still considered “restrictive,” meaning it continues to suppress economic growth. Changes in interest rates can take up to 18 months to fully affect the economy, so the impact of ongoing rate cuts may persist for some time.
The current policy rate set by the Bank of Canada is still higher than what is necessary to stimulate economic growth. This suggests that the economy may continue to face challenges until rates are adjusted further. While the Bank of Canada is expected to continue cutting rates, the speed and extent of these cuts remain uncertain. Some economists believe that it will take until mid-2025 before economic growth begins to accelerate. Over the next year, many homeowners will be renewing their mortgages at higher rates, which could further impact consumer spending and confidence.
Despite the positive news of inflation reaching two per cent, the Bank of Canada is cautious about lowering rates too quickly. The central bank aims for stable price levels and wants to ensure that the economy does not tip into a recession while controlling inflation. Unemployment rates have been rising, particularly among youth and newcomers, which could pose additional challenges for the economy. Economists predict that the unemployment rate will continue to rise in the coming months, but there may be some improvements in economic conditions by 2025. While there is optimism for a gradual recovery, Canada’s economy still has a ways to go before fully rebounding from recent challenges.
