National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). The information contained herein has been prepared by Eric Van Enk, Associate Portfolio Manager and Wealth Advisor at NBF. I have prepared this article to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The opinions expressed represent solely my informed opinions and may not reflect the views of NBF. The particulars contained herein were obtained from sources we believe to be reliable but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF.
Latest Canadian Inflation Data Positive for Consumers
September 28, 2024 Insight from Eric Van Enk, Wealth Advisor & Associate Portfolio Manager
Latest Canadian Inflation Data Positive for Consumers | Kunz Financial Group
The Consumer Price Index declined 0.2% month over month in August after a 0.4% increase in July. This was below the average economists’ forecast calling for inflation to remain at the same level as July. In seasonally adjusted terms, headline prices were up 0.12% in August after a 0.25% increase in July. Year over year, headline inflation cooled from 2.5% to 2.0%, the lowest since February 2021. Importantly, core inflation measures were also lower, 2.4% for CPI trim and 2.3% for CPI median. As a result, the average of the Bank of Canada’s two preferred measures of core inflation moved lower, to 2.4% from 2.5% in August.
Canada: Headline Inflation back to target
Policy rate and annual Inflation
Source: National Bank Financial
As depicted in the supplied chart, headline inflation in Canada (red dotted line) is now at the midpoint of the Bank of Canada’s target range (grey shaded area of 1 – 3%). Notice headline inflation is now well below the Bank of Canada’s overnight policy rate of 4.25% (solid blue line). Recall, the Bank of Canada has recently reduced short-term interest rates by 0.75% with three separate 0.25% cuts since June.
What is most interesting and less obvious from the chart is current Canadian interest rates are the most restrictive they’ve been since 2006. Whether interest rates are restrictive or accommodative is determined by the Bank of Canada’s policy rate being above or below the rate of inflation (blue line is above or below red line). When the Bank of Canada raises interest rates above the rate of inflation, they are doing so to reduce inflation and slow the economy. Conversely, when the Bank of Canada reduces interest rates below the rate of inflation, they are doing so to stimulate the economy and potentially increase inflation if it has fallen below 1% which is the lower end of their inflation mandate.
With inflation now within the Bank of Canada’s target range and the economy slowing, the Bank of Canada is reducing interest rates to bring them back towards a neutral rate (neither accommodative nor restrictive). The National Bank economic team’s estimate for the current neutral rate in Canada is 2.5 – 3%. This means the Bank of Canda needs to reduce interest rates by another 1.25 – 1.75% just to get to a point where rates are no longer restrictive. Given rates will remain restrictive for the near-term, the Canadian economy is expected to continue to slow.
Monetary policy (central banks adjusting interest rates and money supply to control inflation) has a delayed impact on the economy. The economic impact of increasing interest rates was delayed by 18-24 months and the impact of reducing rates, which only began in June, is likely to have a similarly lagged impact. In other words, the Canadian economy is expected to continue to slow well into next year with the impact of lower interest rates not being felt until late 2025 or early 2026. What we won’t know until after the fact is if the Bank of Canada reduced interest rates quickly enough to avoid a recession. With inflation now seemingly under control, I would expect voices calling for the Bank of Canada to cut rates more aggressively to grow louder in coming months.
Eric Van Enk, Wealth Advisor & Associate Portfolio Manager
National Bank Financial – Wealth Management
Medicine Hat, AB
