On October 23nd, 2023, the Bank of Canada announced a significant interest rate cut of half a percentage point, bringing the policy rate down to 3.75 per cent. This decision follows a notable decrease in inflation, which reportedly dropped below the target of 2 per cent in September.
Larry Davey — President and CEO of Access Credit Union provided some insights on what that means, and what we can potentially expect coming down the line.
A Shift in Economic Trends
Reflecting on the current climate, Davey noted, “We’ve seen inflation drop considerably. Last numbers I saw were that inflation was under two per cent, and that allowed the bank to make the big cut...”
When comparing the situation to past events, Davey stated, “I think the rates that were in place prior to the big drop in March of 2020... are likely where we’re going to end up as we move down and trend lower on interest rates.”
He explained that the dramatic cuts during the early days of the COVID-19 pandemic were driven by uncertainty regarding the economy’s response to business shutdowns, unlike the current scenario, which has seen a more stable inflation rate.
“I think the rates that were in place prior to the big drop in March of 2020... are likely where we’re going to end up as we move down and trend lower on interest rates.”
Potential Future Rates
Looking ahead, Davey shared his opinion on where the Bank of Canada could potentially settle.
“I could see the Bank of Canada ending up in and around two per cent, which would likely make mortgages in the three to three and a half per cent ballpark.” This would indicate a potential easing of financial pressure for borrowers.
Davey also discussed the broader economic implications of a lower Canadian dollar in relation to the U.S. monetary policy.
He noted, “They have not had inflation under control to the same degree we have... If they don’t reduce rates and we do, it tends to drive our Canadian dollar a little bit lower... But that’s generally what happens if we’re lowering rates, and the US is not.”
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The Road Ahead
When asked if such a significant rate of cuts could be happening again under normal economic conditions, Davey expressed skepticism.
“I would say it wouldn’t happen in a typical economic climate... at the end of the day, if five-year mortgages end up between three and three quarters of a point, that’s much lower than the average rates have been over the last fifty years.”
Davey shared that while there may be increases compared to rates from five years ago, many homeowners have benefited from substantial increases in their property values.
Key Economic Factors
To help equip people with the knowledge on how the country’s financial decisions get made, Davey also shared what economic data most influences future rate decisions.
“There [are] probably two or three big numbers... One would be inflation... the second one is the jobs report and how the economy is working with jobs... and probably the final one is GDP (Gross Domestic Product) and how much is being spent in the economy.”
In relation to those numbers: the Bank of Canada reported that inflation is around its targets, while the labour market remains soft with unemployment rising to 6.5 per cent in September. Additionally, GDP growth is expected to gradually strengthen as a result of the lower interest rates.
Click below to hear the full interview with Larry Davey.