Key points:
- Interest rates will decrease when we enter a recession, and when inflation in Canada reaches its target level of two to three per cent.
- The severity of a recession in Canada is up for debate due to Canada’s strong employment record, and its current very low unemployment rate.
When can we expect to see interest rates drop?
In this video, I explore what needs to happen before we will see interest rates drop in Canada. A large part of it depends on inflation reaching its target level, and a recession hitting the economy. Here are some more details on what’s to come.
Don’t feel like watching? Find the full transcript below!
Chris: [00:00:02] When will interest rates drop? Frankly, I don’t have an answer to that. But what I can share with you is the formula that would help us predict when interest rates should drop.
When will Canada hit a recession?
Chris: [00:00:15] The formula is quite simple. Rates will drop in Canada when we have a recession, and we have the inflation rate between the 2 to 3 per cent target that has been communicated by the Bank of Canada. That will be when we have low rates. So in order to predict when interest rates will drop, we really need to have a discussion about the two parts of this equation, which is recession and inflation.
Chris: [00:00:43] So when can we expect a recession? Well, globally, things are not looking so strong. There are a lot of economic headwinds. In the Eurozone, we are seeing the deepening energy crisis as winter approaches, along with inflation and high interest rates that is fully expected to push Europe into recession. In England, the Bank of England has already declared that that country and the UK is in recession. And that’s along with rising interest rates, that is getting deeper and more complex. At the time of recording this video, the the economic market in England is in absolute turmoil. And in China, we’re seeing diminishing growth in that country as well, which for decades has been the poster child of growth globally. And so if GDP output is diminishing in China, that says a lot about global growth.
Employment is strong in Canada
Chris: [00:01:42] Here in Canada, domestically recession fears are prominent. Economists and bond traders are fully pricing in a recession within the next two years. But the severity of that recession really is up for debate because we have one thing going for us in Canada, and that is a very low unemployment rate. In fact, last month there were a reported one million job vacancies that needed to be filled, meaning employers are desperately looking for workers. And as long as Canadians are employed, it should insulate the impact of a of a recession here in Canada. And it’s for that reason that the Bank of Canada and also in the United States, very similar issue mirroring Canada. They anticipate that they will need to do more work, raising interest rates to cool markets off to get balance again so that we can operate at capacity and not overcapacity as the employment numbers are suggesting right now.
Inflation remains stubborn
Chris: [00:02:48] The second part of this equation is inflation, and we are starting to make some headway against inflation here in Canada. In fact, we saw headline inflation drop in both July and August. It’ll be a few more weeks before we see the September numbers, but we expect that trend to continue. However, that was the headline inflation. Core inflation, which is a much better metric that the central bankers use to determine inflation, strips out the cost of fuel and food, which are most volatile in this equation. And core inflation has remained relatively hot and isn’t yet declining. And it’s for this reason that the Bank of Canada is anticipating and predicting that it will take all of 2023 to lower core inflation to that 2 to 3 per cent target range.
Chris: [00:03:45] So with all of that information, where does that leave us for interest rates in Canada? Due to the stubborn inflation and very strong employment numbers at the moment, the expectation is that rates will need to rise further, probably approaching a 6 per cent level for a five year fixed in order to curb inflation and get the economy at capacity and not overcapacity. However, the backdrop of all of this is that the monetary policy that is being instituted right now so aggressively may be overshooting the mark and there isn’t quite enough time for monetary policy, the effects of monetary policy, to catch up with the numbers. Everything is lagging behind. There is an expectation that this smashing hammer action of rising interest rates will have its desired effect fairly quickly and will eventually do two things. Push the Canadian economy into a recession. How severe? We don’t know. Maybe mild, maybe deep. And number two will create a deflationary environment where interest rates will have to drop in order to support economic growth again. And the entire cycle can start all over again from zero.
Need more help or information?
Chris: [00:05:09] My name is Christopher Molder. I am a Toronto based mortgage broker. If you would like to discuss how current and future interest rates will impact you and your life, I invite you to get in touch with me. Please visit me on my website, tridacmortgages.com To book a call or reach out to me directly at 4167328020. Till next time. Bye for now.
You can book a call directly into my calendar below, or get in touch with me here.
