This year we have seen a notable shift in Canada’s economic landscape. Inflation rates, which were soaring around 5.1% to even 6.7% in 2022 alone, have significantly decreased, reaching 2.5% this past July. To help unpack what this means and how it impacts Southern Manitobans, we spoke with Larry Davey – the President and CEO of Access Credit Union for his expert insight.
Providing Context
To help establish a baseline, Davey offered a quick explanation of inflation, and what the figure itself means. “This number looks at many areas of the economy, but what this really means is overall in the past year, prices have gone up about two and a half percent... When the Bank of Canada is looking to move our economy forward, they’re looking to keep the inflation rate between two and three percent.”
Driving Factors
Davey went on to explain why inflation had been so high, and what sort of economic forces have been at play over the past few years. “When we went through the COVID situation, there was an excess of money because people... had saved a lot of money, and at the same time, some products couldn’t be delivered... Demand picked up... People wanted more and more products, and with fewer products available, it drove prices up.” According to Davey, the supply chain disruptions created by the pandemic increased consumer demand, leading to rising prices, which reflected in the inflation figure seen at the time.
Interest Rates
The Bank of Canada took action to combat rising inflation by adjusting interest rates. Davey elaborates, “As a result, we saw inflation increasing. What the bank does to defer that increase is they raise interest rates. By raising interest rates, people then have to think about what’s going to happen to my mortgage... my care payments... And that reduces the demand on the economy.”
Davey explained that through making borrowing more expensive via higher interest rates, the Bank of Canada cooled down consumer spending, creating a ripple effect. With less consumer spending, suppliers have a chance to build up their inventories. That increase in supply helps to stabilize or even lower prices over time, which is reflected by the decrease in inflation.
As inflation has eased, there’s speculation about the future of interest rates. Davey provided us with some perspective but did point out that trying to forecast anything for certain is tricky at best. “Over the last couple of months, interest rates have dropped. The Bank of Canada rate has dropped about half a percent. The anticipation is over the next probably four months, we’re going to see interest rates drop about a half a percent again, and the anticipation for the next year, a further one, to one and a half percent drop in interest rates.”
Housing Market Advice
For anybody considering buying a home in the near future, Davey offers a bit of practical advice, “If you really want to buy something now, I would suggest you go with a shorter term or a variable that you can lock in at a later time... I don’t think you’re going to see any huge drop in values of homes on an individual basis... The market will slow as people don’t rush in, but [rather] wait for rates to come down.”
As we look further ahead, Davey maintains a realistic outlook about the future of interest rates, saying that the days of 1.9% for five years when COVID hit are unlikely to return. “I think what you’re probably going to see at the end of the day is mortgage rates for five years in at around four percent to maybe a bit under four percent in the next year or two.”
Conclusion
The balance between inflation, interest rates, and economic stability is something that can be difficult to wrap your head around; but whether considering buying a home or managing existing finances, staying informed on the current landscape can be a great way to help build confidence when making those personal financial decisions.