With inflation in Manitoba and across the country on a downward trajectory, Chris Ferris, Senior Economist at Economic Development Winnipeg, suggests the Bank of Canada (BOC) is preparing to give Canadians a break.
Ferris points out that the prevailing consensus among economists is that the BOC will start to cut the overnight rate from its current level of 5.0% in the second half of the year.
The BOC's overnight rate—which establishes the lending rate used by various financial institutions, including banks and credit unions—plays a pivotal role in shaping interest rates for mortgages and lines of credit.
Setting the overnight rate involves a delicate balancing act in an inexact science; however, the BOC had previously expressed that it was reluctant to lower rates before inflation fell within its target range of one to three per cent.
“I’m expecting multiple rate cuts of a quarter-point at a time,” Ferris says. “The bank’s history since the late 1990s is it rarely cuts rates by more than 25 basis points unless there’s a crisis. There’s no crisis today.”
“I believe we’re at the best spot we’ve been in since 2021 and it’s going to be even better a year from now. We’re in the early stages of the good economic cycle. We’re just about to start that upswing again in terms of positive news.”
In fact, Ferris says it’s possible the overnight rate could drop to 3.5 per cent in a year depending on economic performance.
Canadian inflation fell to 2.8 per cent in February, down from 2.9 per cent in January and 3.4 per cent in December. Manitoba inflation peaked in June 2022 at 8.1 per cent.
Perhaps the most interesting statistic in the latest batch of data is food inflation — food bought from stores — is down to 2.4 per cent, the lowest level since June 2021 and the first time it’s been lower than overall inflation since October 2021.
Inflation in Manitoba is down to 0.9 per cent, thanks largely to the recent 14-cent per litre gas tax break. It hasn’t been below one per cent since early 2021.
The impact of lower interest rates will be felt by consumers and businesses alike. Consumers with variable rate mortgages will see immediate declines in their payments while rates for new fixed-rate mortgages will start to fall, too.
“You’ll get a little less squeeze from your mortgage payments; the lower borrowing costs will give you a little more room. Some food prices are still a little sticky, like for beef,” Ferris says.
Borrowing costs for businesses will decline, too, which could prompt a flurry of activity.
“A lot of business projects have been put on hold over the last couple of years. Developers weren’t building housing. Lower rates will allow all of that to start up again. A lot of projects that were marginal, now you’ll see them activated as the rates come down,” he says.
Lower interest rates also bode well for economic development. When consumers and business owners are feeling the pinch, it’s harder to justify going on a personal or business trip.
“Now you’ll be able to book it. Restaurants and hotels should expect an uptick in business,” he says.
The BOC increased interest rates by 475 basis points, or a total of 4.75 per cent, to a 22-year high between March 2022 and last July. It has kept the overnight steady since then.
Find a more detail analysis of Manitoba inflation in Chris Ferris’ review of February 2024 inflation.