Inflation in Canada drops but housing costs remain high


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Inflation in Canada dropped to 2.9 percent in the month of January. Will this cause the Bank of Canada’s interest rates to be cut sooner than expected by the Bank of Canada?

There is still a divide in opinion among leading economists. 

“Clearly today’s result makes rate cuts much more plausible in coming months, and we remain comfortable with our call that the (Bank of Canada) will begin trimming in June,”Douglas Porter, Chief Economist at Bank of Montreal.

“There is little debate on this one — it’s a much milder reading than expected,”Porter, Mr.

Bank of Canada looks for a Trend

On the other hand, Scotiabank’s Derek Holt urges caution. 

“The Bank of Canada is searching for a more convincing trend. One month doesn’t cut it.”

“It’s just one month, folks,”Holt, wrote “Chill. That’s the line I would expect the Bank of Canada to apply here and perhaps by repeating their prior references to taking the ‘ups and downs’ of the measures in stride as one of their Deputy Governors once put it.”

The inflation rate of 2.9 percent for January was below expectations. Many economists predicted it would be  3.3 percent following December’s 3.4 figure. 

Canadian energy prices are lower

It’s the first time the Consumer Price Index (CPI) reading has dropped below 3 percent since June’s 2023 2.8 percent reading.

The drop in prices was primarily due to lower energy costs (a 4 percent decline in gas prices annually) and a decrease in grocery prices. In January, they were down 3.4 percent compared to December’s 4.7 percent.

The cost of living is a major factor for those newcomers coming to Canada soon, or even those who are already here. Housing, transportation and food costs are all important factors when choosing where to settle.

Immigration to Canada remains strong. In November, Immigration Minister Marc MillerCanada announced it still plans on settling 485,000 newcomers by 2024 and another 500,000 by 2025.

April rate cuts are unlikely

Many newcomers come to Canada with the intention of buying a home. The impact of interest rates on mortgage rates will affect these plans. 

Bank of Canada officials have stated repeatedly that the Bank will not cut interest rates until inflation appears. “sustainably” close to the Bank’s target of two percent. 

Most economists believe that the Bank of England could start reducing the overnight interest rate (which is currently at five percent) as early as March 6, but the first cut would most likely be in April.

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No rate cut until mid-2024

The BoC has raised interest rates ten time since March 2022 to bring inflation under control. It’s part of a strategy to make it more expensive to borrow money, which will make consumers and businesses spend less, thus forcing down prices and slowing the economy.

Inflation rose to  8.1 percent in June 2022 but since then has shown a steady downward trend.

Pedro Antunes, the chief economist at the Conference Board of Canada, said that he and his colleagues believe the BoC will likely wait until mid-2024 before it begins cutting the rate, despite January’s surprise drop in inflation.

“I think unless the economy really takes a real dive, they’re not going to change their timing.”

Housing costs are rising because of rate hikes

David Macdonald is an economist at the Canadian Centre for Policy Alternatives. He argues that rates should have been cut already.

Macdonald believes that the Bank’s rate hikes make inflation worse, either through mortgage rate increases or through landlords increasing rents to help cover their mortgage costs.

“We’re at a point now where shelter is the biggest single driver of inflation.”

The highest inflation pressure continues to be caused by housing costs. In January, they rose to 6.2 percent compared to 6 percent in December.

Rents have reached a new record

The component of the Consumer Price Index that includes mortgage interest costs is up by 27.4 percent.

According to the most current National Rent Report from, and Urbanation in January 2024, asking rents in Canada for all residential properties types reached another record in January, up by 10.0 percent over the previous year, to an average of 2,196 dollars. 

Rents rose by 0.8 percent in January compared to December, bringing the annual growth rate of rents to a record high.

Leslie Preston, TD economist, says that housing is a problem. “inflation has become the biggest hurdle preventing the Bank from cutting interest rates.”

Inflation numbers are good news for homeowners

Writing in the Globe and Mail, Erica Alini says that January’s  lower-than-expected inflation reading from Statistics Canada is “welcome news for both variable-rate mortgage holders and anyone thinking about signing up for a new fixed-rate mortgage.”

Alini says that if the Bank of Canada cuts the interest rate because of the inflation figures, “variable-mortgage-rate holders have only a few more months to go before they’ll see their mortgage interest costs decline.”

Also, borrowers with adjustable payments will see their mortgage installments shrink as their rate decreases with the Bank of Canada’s key rate. 

Alini writes, those with fixed mortgage repayments will see more money going towards their mortgage balance instead of paying off interest.

Steve Tustin, editor of Rentals for Newcomers as well as contributing editor for Prepare for Canada. He was the former managing director of Storeys.comFormer senior editor of the Globe and Mail and Toronto Star.

*Prepare for Canada used no AI-generated content in the writing of this story, and all sources are cited and credited where possible.

© Prepare for Canada 2023

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