The Canadian economy has been on quite a ride lately, especially when it comes to interest rates and inflation. As we head into the latter part of 2024, it’s important to understand how recent changes—like the drop in September’s inflation rate—could affect your financial situation. Let’s break down the latest developments and what they could mean for things like interest rates, borrowing, and the overall economy in the coming months.

September Inflation Falls to 1.64%: What Does It Mean?

In September 2024, inflation dipped to 1.64%, which is lower than the Bank of Canada's (BoC) 2% target. At first glance, this might seem like good news. Prices are still going up, but not as quickly as they were. However, don’t be fooled—prices aren’t actually falling; they’re just rising at a slower rate than what the BoC would like to see.

This unexpected drop in inflation could put pressure on the BoC to cut interest rates more aggressively. The idea behind cutting rates is to stimulate economic activity. Still, with inflation already below target, the BoC may feel the need to act faster to prevent a prolonged economic slump.

Are the Recent Rate Cuts Enough?

Over the past year, the BoC has slashed interest rates by 75 basis points (bps). But here’s the catch: even with these cuts, the real cost of borrowing (known as the “real policy rate”) has actually tightened by 141 bps. That’s because inflation has fallen faster than the rate cuts, which means borrowing is still relatively expensive for consumers and businesses.

So, what does this mean for mortgages, car loans, and other types of debt? Essentially, even though the BoC is trying to make borrowing cheaper, higher real policy rates are keeping the costs up. Some are worried the BoC might be playing it too safe and could slow the economy even further if it doesn’t move more quickly.

Experts Push for More Aggressive Rate Cuts

A number of leading economists are starting to speak out, urging the BoC to be more assertive. Former BoC deputy Paul Beaudry has even called for a 50 bps cut at the next policy meeting on October 23, 2024. Along with others, like National Bank’s chief economist Stéfane Marion, he believes the BoC should aim to get the overnight rate down to around 3% as quickly as possible. That’s considered the “neutral” rate—where the economy isn’t being overly stimulated or held back.

Right now, rates are still above that neutral level, which means borrowing costs are higher than many would like. Stéfane Marion went so far as to say, “We needed to be there yesterday,” highlighting the urgency some feel about cutting rates sooner rather than later.

What’s Next for the Bank of Canada?

On October 23, all eyes will be on the BoC as they decide whether to take bolder action. Many are expecting at least a 50 bps rate cut, but even if that happens, it’s important to remember that interest rate changes usually take about 18 months to fully play out in the economy. So, while there may be some relief in borrowing costs, the full impact likely won’t be felt until 2025 or beyond.

The BoC is in a tricky spot. They need to lower rates to support the economy, but they also have to be careful not to overdo it and risk causing a recession if they act too quickly or not quickly enough.

How Does This Affect You?

For Canadians with mortgages or those thinking about buying a home, the current rate environment is definitely something to keep an eye on. If the BoC continues cutting rates, variable-rate mortgages could become more attractive, offering flexibility as rates decline. On the other hand, if you’re looking for stability in your payments, it might be a good time to lock in a fixed-rate mortgage while the market adjusts.

Businesses, too, are likely paying attention. Some might hold off on big investments until borrowing becomes more affordable. That could have ripple effects on jobs and the overall economy, so it’s important to stay informed about how these changes might impact your financial decisions.

Conclusion: What’s Next?

With inflation now below target and more economists calling for deeper rate cuts, the next few months could be crucial in shaping the direction of interest rates. Whether you’re a homeowner, a potential buyer, or a business owner, staying on top of these developments is key to making smart financial decisions.

If you have questions about navigating the current mortgage market, don’t hesitate to reach out to us. We’re here to help you find the best strategy, no matter which way the economy turns.