This time, the release said, “Higher interest rates are clearly restraining spending: consumption growth in the last two quarters was close to zero, and business investment has been volatile but essentially flat over the past year. Exports and inventory adjustment subtracted from GDP growth in the third quarter, while government spending and new home construction provided a boost. The labour market continues to ease: job creation has been slower than labour force growth, job vacancies have declined further, and the unemployment rate has risen modestly. Even so, wages are still rising by 4-5%. Overall, these data and indicators for the fourth quarter suggest the economy is no longer in excess demand.”

At the prior meeting in late October, the Bank said that the labour market remained “on the tight side” but acknowledged today that it was loosening. Indeed, the October Monetary Policy Report suggested that the inflation rate would not hit its 2% target level until late 2025.

The central bank focuses on “the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour” and remains resolute in restoring price stability.

Bottom Line

Bond yields peaked in early October and have fallen by nearly 100 basis points. This has led to reductions in fixed mortgage rates; however, those cuts have been far less than historical experience would have suggested, given the rally in 5-year government bonds.

Cuts in variable mortgage rates await a reduction in the overnight policy rate, which triggers a commensurate decline in the prime rate, which is currently stuck at 7.2%. I expect the BoC to begin cutting the policy rate by the middle of next year, taking it down a full percentage point to 4% by yearend.