In a recent twist of economic fate, the latest inflation figures have thrown a curveball at those crossing their fingers for a prompt Bank of Canada rate cut. The consumer price index decided to show off a bit, surging to a formidable 3.4% in December, giving the central bank’s endeavors to rein in escalating prices a run for their money.
While the uptick in the headline pace was somewhat anticipated, economists found themselves raising their eyebrows at the unexpected rise in measures that weed out volatility – enter CPI trim and median core rates, the Bank of Canada’s go-to favorites. These indicators not only met expectations but sashayed beyond them.
Leslie Preston, the maestro of economics over at TD Economics, swiftly threw a bucket of cold water on the notion that this data spells out an imminent rate cut. She underscored the Herculean task of wrangling inflation all the way back to the coveted 2% mark.
The inflationary rollercoaster has prompted a shift in the sands of market expectations, pushing the timeline for the Bank’s first cut from April to June. Yet, amidst the cautious tango, some economists, TD included, are still throwing confetti on the idea of an earlier cut, convinced that the economy will have taken a chill pill by early spring, even if inflation hasn’t quite gotten the memo.
Tu Nguyen, the clairvoyant economist at RSM Canada, envisions a rate cut shindig as early as April. He points to the sluggish economy doing the moonwalk and the dominance of shelter-driven inflation as the main culprits. Channelling his inner Governor Macklem, Nguyen echoes the sentiment that the Bank need not witness a 2% inflation spectacle but should just be darn confident it’s headed in that direction.
Capital Economics, ever the pragmatic party planner, adjusts its call from March to April but clings to the belief that the inaugural rate cut soirée is fast approaching due to the weakened economy. Stephen Brown, Capital’s deputy chief North America economist, foresees the Bank unveiling a revised economic and CPI forecast on Wednesday that’s less sparkling than a disco ball.
The December inflation fiesta showcased shelter costs, particularly mortgage interest, stealing the limelight as the prima donnas of price gains. Brown presents the Bank with a conundrum – should it embrace higher rent inflation or keep interest rates high, potentially orchestrating a deeper economic drama?
While higher interest rates are already playing the role of party pooper in Toronto’s housing starts, a city known for its lively immigrant population, Brown suspects the Bank might soon shift its focus to the melancholic tune of a weak economy and slowing inflation.
Looking ahead, the trendsetting economist at BMO, Shelly Kaushik, reveals that housing starts on single-family homes in 2023 were partying like it was 1953 – among the lowest in 70 years. Meanwhile, apartment starts reached a record high, as if they were vying for the ‘Chart-Topping Building of the Year’ award.
Kaushik dishes out the backstory, involving government legislation throwing developers into the world of higher density since the mid-2000s. The growing population and shrinking household size joined the party, increasing the demand for more intimate spaces. The cost of houses, a notorious gatecrasher, also made its presence felt.
Yet, in the midst of this real estate rhapsody, Canadians are still clinging to the dream of larger, more remote dwellings – a pandemic hangover, perhaps. Throw in millennials stepping onto the home-buying dance floor, and Kaushik predicts that the demand for single-family homes will continue to hit the high notes, even when the supply is playing hard to get.
