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Inflation has cooled to the Bank of Canada’s 2% target, but will it remain there and does it mean a 50 basis point rate cut is on the table? MoneyTalk’s Greg Bonnell discusses with Robert Both, Senior Macro Strategist with TD Securities.
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Well, the latest Canadian CPI report showing headline inflation back down to the Bank of Canada's 2% target. And we've got signs, of course, that the economy has been slowing. Should we expect jumbo rate cuts from the Bank of Canada? Joining us now to discuss is Robert Both, Senior Macro Strategist with TD Securities. Robert, great to have you back on the show, particularly on a day like this.
Thank you, Greg. Always a pleasure to be back on the show, especially when we can talk about something like inflation finally getting back to the Bank of Canada's target.
It's hit the bull's eye. How often have you and I talked over the past two years about the fight against inflation, trying to bring it down through the higher borrowing costs? We're at 2%. How should we be framing this?
So I think there are a couple of things to point out right away. One is that that 2% reading on total inflation was actually a little bit softer than we and the market had forecast. We thought it would just get to 2.1. So that is very positive news, that inflation is falling a little bit more quickly than we anticipated.
But I don't think we should get too complacent about inflation staying here for the longer term yet. We look for inflation to tick higher over the fourth quarter. The Bank of Canada has a bit of a push higher built into their forecasts as well. So while this initial return to the target range, or 2% target, is very welcome, we shouldn't necessarily expect it to stay here over the next few months. And we shouldn't necessarily view this as a sustained return, which is the ultimate goal.
Yeah, if we're talking about stickiness in the numbers, when I took a look at them, it's sort of the culprit that's been dogging inflation throughout the summer, shelter costs, whether it's mortgage interest costs or whether it's just rent.
Yeah, so even with that positive headline number, we did see another large increase in rents today. Rents are actually at their highest point of the cycle, over 9% year over year. And you're seeing a bit of a wedge between inflation pressures for renters versus homeowners. So shelter's still very much a focus, as we hopefully get back to that sustained return to 2%.
But what you are seeing in today's report is you are seeing a larger drag from goods prices to offset that. So furniture, motor vehicles, clothing, all those discretionary spending categories, we've been cutting back on those to focus on debt payments. That is showing up in the inflation data. And that's helping to offset some of that stickiness when it comes to shelter prices.
Now, ahead of today's report, obviously through the summer, the Bank of Canada has been cutting. We've had three interest rate cuts from them. We've peeled back by 75 basis points. Still a feeling out there that the rate we're at right now is too high for the state of this economy. What is the Bank of Canada going to have to do over the next little while?
Well, I think we have to remember that, yes, this is a very important step on the road to the finish line. But we're not quite there yet. The Bank of Canada knows that this is probably going to be rather short lived. But with today's downside surprise, we are now tracking Q3 inflation below the forecast the Bank of Canada projected in July. Core inflation wasn't as big of an outlier today. It was roughly in line with where the market saw it. It's running about 2.3%, 2.4%, depending on the measure.
So while that is also slightly below where the Bank of Canada had it in their July forecasts, we're not necessarily back to the target yet. So while those fears about inflation proving more persistent and perpetually stalling above the target range, those fears are looking like less of a risk today than they did six months ago.
That does help to reinforce the Bank of Canada's recent pivot to putting more weight on downside risks going forward. But we're still sitting above the target, or the core inflation measures are still sitting above that 2% target. So we're getting closer. But we're not quite there yet.
Now, if I just walked up to someone who follows this kind of stuff-- I wouldn't hit the normal person with this kind of lingo-- but I said, what do you think? They're going to give us 50 basis points of the next meeting? Up until a little while ago, people would have understood I was talking about the US Federal Reserve. But that conversation has started to creep into Canada. Is there a justification in late October, the next meeting, they could go 50 basis points?
We are hearing more and more discussion about the risk of 50 basis point cuts. It's something the Bank of Canada governor spoke about in his post-decision press conference. It's something he spoke about again in an interview with the Financial Times that was released over the weekend. But we think any discussion of larger 50 basis point cuts in Canada is going to involve a scenario where we have seen some downside risks to growth materialize.
So even though inflation is tracking a little bit better than the Bank of Canada had projected just a couple of months ago, we do think there would need to be a larger growth shock to provide a little more urgency to do those larger 50 basis point cuts. Traditionally, you would not accelerate the pace of rate cuts to 50 basis points in a scenario where you expected just to get back to neutral policy and then stay there.
Traditionally, we've seen those 50 basis point cuts materialize in a scenario where the Bank of Canada has had to go through neutral and had to provide stimulus to the economy. So we don't think we're there yet. But with inflation proving to be a little less persistent than many expected, I think you can look at this as something that could pull forward that timeline to get back to neutral.
How do the other parts of the economy-- now that we have an inflation at this number, they don't expect it just to sit at 2. It could be a bit of a bumpy ride through the fall. But the rest of the economy, the labor market, GDP, how is all that lining up?
So, so far, the third quarter has roughly evolved in line with our own projections. The Bank of Canada was a bit of an outlier in their last forecast. They had a very, let's call it, lofty projection for Q3 growth. The Bank of Canada was essentially looking for the economy to accelerate to a 2.8% growth rate. Given the monthly activity data we've seen for July, given the expected impact of those railway strikes in August, it's become very difficult to see that acceleration taking place.
We don't think that's necessarily the cause for alarm. There are explanations for why Q3 growth's been a little bit weaker than the first half of the year. But as we do get into the end of the year, we do expect to see growth returning to that trend-like pace. And in 2025, we do expect to start absorbing some of that excess supply that's built up over the last couple of years. So you're seeing that period of softer growth reflected in the labor markets. Unemployment rate has risen. But we do expect we are still going to see a soft landing.
Now, that's a nice breakdown of the situation here in Canada, the news of the day. Of course, the big event for global markets is coming on Wednesday, coming tomorrow, the Fed. What are we thinking about there?
Well, you're right that the Canadian CPI figures, while certainly interesting and topical to those north of the border, the Fed is going to be the main event for markets this week. So right now, we're heading into this Fed meeting, pricing just over 50% chance of a 50 basis point cut. We think the Fed is going to do 25. We think that it is a very close call. Our preview that we published early this morning had a 40% risk that they do do a larger rate cut.
But we think, much like Canada, there's really not enough urgency from the Fed, given we are still heading towards that soft landing. Even with softer pace of job growth, things aren't necessarily falling off the wheels. The Fed's also going to be giving a new dot plot at this meeting. So there is going to be more guidance than what we're accustomed to in Canada.
And I think that dot plot is going to be really under a microscope because that's going to give us an indication of whether individual members of the FOMC actually expect rate cuts at a 25 or 50 basis point increment going forward. So we think that dot plot is going to show 25 basis point cuts in the next two meetings. But there's certainly a risk you will see individual dots pointing to a more aggressive easing path. [AUDIO LOGO]
[MUSIC PLAYING]
Well, the latest Canadian CPI report showing headline inflation back down to the Bank of Canada's 2% target. And we've got signs, of course, that the economy has been slowing. Should we expect jumbo rate cuts from the Bank of Canada? Joining us now to discuss is Robert Both, Senior Macro Strategist with TD Securities. Robert, great to have you back on the show, particularly on a day like this.
Thank you, Greg. Always a pleasure to be back on the show, especially when we can talk about something like inflation finally getting back to the Bank of Canada's target.
It's hit the bull's eye. How often have you and I talked over the past two years about the fight against inflation, trying to bring it down through the higher borrowing costs? We're at 2%. How should we be framing this?
So I think there are a couple of things to point out right away. One is that that 2% reading on total inflation was actually a little bit softer than we and the market had forecast. We thought it would just get to 2.1. So that is very positive news, that inflation is falling a little bit more quickly than we anticipated.
But I don't think we should get too complacent about inflation staying here for the longer term yet. We look for inflation to tick higher over the fourth quarter. The Bank of Canada has a bit of a push higher built into their forecasts as well. So while this initial return to the target range, or 2% target, is very welcome, we shouldn't necessarily expect it to stay here over the next few months. And we shouldn't necessarily view this as a sustained return, which is the ultimate goal.
Yeah, if we're talking about stickiness in the numbers, when I took a look at them, it's sort of the culprit that's been dogging inflation throughout the summer, shelter costs, whether it's mortgage interest costs or whether it's just rent.
Yeah, so even with that positive headline number, we did see another large increase in rents today. Rents are actually at their highest point of the cycle, over 9% year over year. And you're seeing a bit of a wedge between inflation pressures for renters versus homeowners. So shelter's still very much a focus, as we hopefully get back to that sustained return to 2%.
But what you are seeing in today's report is you are seeing a larger drag from goods prices to offset that. So furniture, motor vehicles, clothing, all those discretionary spending categories, we've been cutting back on those to focus on debt payments. That is showing up in the inflation data. And that's helping to offset some of that stickiness when it comes to shelter prices.
Now, ahead of today's report, obviously through the summer, the Bank of Canada has been cutting. We've had three interest rate cuts from them. We've peeled back by 75 basis points. Still a feeling out there that the rate we're at right now is too high for the state of this economy. What is the Bank of Canada going to have to do over the next little while?
Well, I think we have to remember that, yes, this is a very important step on the road to the finish line. But we're not quite there yet. The Bank of Canada knows that this is probably going to be rather short lived. But with today's downside surprise, we are now tracking Q3 inflation below the forecast the Bank of Canada projected in July. Core inflation wasn't as big of an outlier today. It was roughly in line with where the market saw it. It's running about 2.3%, 2.4%, depending on the measure.
So while that is also slightly below where the Bank of Canada had it in their July forecasts, we're not necessarily back to the target yet. So while those fears about inflation proving more persistent and perpetually stalling above the target range, those fears are looking like less of a risk today than they did six months ago.
That does help to reinforce the Bank of Canada's recent pivot to putting more weight on downside risks going forward. But we're still sitting above the target, or the core inflation measures are still sitting above that 2% target. So we're getting closer. But we're not quite there yet.
Now, if I just walked up to someone who follows this kind of stuff-- I wouldn't hit the normal person with this kind of lingo-- but I said, what do you think? They're going to give us 50 basis points of the next meeting? Up until a little while ago, people would have understood I was talking about the US Federal Reserve. But that conversation has started to creep into Canada. Is there a justification in late October, the next meeting, they could go 50 basis points?
We are hearing more and more discussion about the risk of 50 basis point cuts. It's something the Bank of Canada governor spoke about in his post-decision press conference. It's something he spoke about again in an interview with the Financial Times that was released over the weekend. But we think any discussion of larger 50 basis point cuts in Canada is going to involve a scenario where we have seen some downside risks to growth materialize.
So even though inflation is tracking a little bit better than the Bank of Canada had projected just a couple of months ago, we do think there would need to be a larger growth shock to provide a little more urgency to do those larger 50 basis point cuts. Traditionally, you would not accelerate the pace of rate cuts to 50 basis points in a scenario where you expected just to get back to neutral policy and then stay there.
Traditionally, we've seen those 50 basis point cuts materialize in a scenario where the Bank of Canada has had to go through neutral and had to provide stimulus to the economy. So we don't think we're there yet. But with inflation proving to be a little less persistent than many expected, I think you can look at this as something that could pull forward that timeline to get back to neutral.
How do the other parts of the economy-- now that we have an inflation at this number, they don't expect it just to sit at 2. It could be a bit of a bumpy ride through the fall. But the rest of the economy, the labor market, GDP, how is all that lining up?
So, so far, the third quarter has roughly evolved in line with our own projections. The Bank of Canada was a bit of an outlier in their last forecast. They had a very, let's call it, lofty projection for Q3 growth. The Bank of Canada was essentially looking for the economy to accelerate to a 2.8% growth rate. Given the monthly activity data we've seen for July, given the expected impact of those railway strikes in August, it's become very difficult to see that acceleration taking place.
We don't think that's necessarily the cause for alarm. There are explanations for why Q3 growth's been a little bit weaker than the first half of the year. But as we do get into the end of the year, we do expect to see growth returning to that trend-like pace. And in 2025, we do expect to start absorbing some of that excess supply that's built up over the last couple of years. So you're seeing that period of softer growth reflected in the labor markets. Unemployment rate has risen. But we do expect we are still going to see a soft landing.
Now, that's a nice breakdown of the situation here in Canada, the news of the day. Of course, the big event for global markets is coming on Wednesday, coming tomorrow, the Fed. What are we thinking about there?
Well, you're right that the Canadian CPI figures, while certainly interesting and topical to those north of the border, the Fed is going to be the main event for markets this week. So right now, we're heading into this Fed meeting, pricing just over 50% chance of a 50 basis point cut. We think the Fed is going to do 25. We think that it is a very close call. Our preview that we published early this morning had a 40% risk that they do do a larger rate cut.
But we think, much like Canada, there's really not enough urgency from the Fed, given we are still heading towards that soft landing. Even with softer pace of job growth, things aren't necessarily falling off the wheels. The Fed's also going to be giving a new dot plot at this meeting. So there is going to be more guidance than what we're accustomed to in Canada.
And I think that dot plot is going to be really under a microscope because that's going to give us an indication of whether individual members of the FOMC actually expect rate cuts at a 25 or 50 basis point increment going forward. So we think that dot plot is going to show 25 basis point cuts in the next two meetings. But there's certainly a risk you will see individual dots pointing to a more aggressive easing path. [AUDIO LOGO]
[MUSIC PLAYING]
