Families and businesses seeking relief from the pressures of high interest rates would love to know when the Bank of Canada is going to start lowering rates.
Despite a slowdown in price increases compared to 2022, core measures of inflation, including the Consumer Price Index (CPI), remain above the Bank of Canada’s target range of 1-3%.
Since July 12, 2023, the Bank of Canada has kept rates steady at 5% to combat persistent inflation. It has also engaged in quantitative tightening since April 2022, around the same time they started increasing interest rates.
Quantitative tightening involves selling off bonds or not renewing them when they mature. This increases the supply of bonds on the market and decreases the supply of money. Overall, quantitative tightening makes borrowing more expensive because it becomes harder for governments and businesses to sell their debt and they must pay higher interest rates to sell new bonds. It also reduces the amount of money that banks have available to lend. The hope is that this will help control inflation by reducing spending and investment, in the same way that high interest rates are supposed to control inflation by reducing spending and investment. In the last two years, the Bank of Canada has reduced the amount of federal bonds it holds by about $165 billion, or 38% of their federal bond holdings.
Economists expect the Bank of Canada will stop quantitative tightening before they lower interest rates, although there are no guarantees. The pace of quantitative tightening slowed near the end of 2023, but the Bank of Canada announced plans in January to continue it until at least mid-2024.
It may also take longer than expected for price increases to stabilize. The Bank of Canada would like to keep price increases in the range of 1–3%. We measure price increases through CPI, which tracks the average price change for a representative basket of goods and services. The Bank of Canada looks at different components and tries to isolate volatile changes to understand trends.
One factor driving CPI growth is the increase in housing costs. Rising mortgage rates and rental costs accounted for about half of overall CPI growth throughout most of 2023, a trend likely to continue through 2024. Even though the spike in housing costs is a direct result of higher interest rates, it’s also what’s delaying the decision to lower interest rates. Although this seems counterintuitive, the Bank of Canada may be worried that if they make borrowing money cheaper too quickly, prices for other things might start to climb, too. The Bank of Canada is likely to be cautious and to look for slow and steady price growth across broad areas of the economy before lowering rates.
Given these complex factors, there is too much uncertainty for economists to predict when the Bank of Canada will lower rates.