Prolonged economic volatility might pull down inflation to multi-decade lows
Canada’s core inflation is likely to continue falling to record lows, in turn affecting potential mortgage rates, according to a RateSpy analysis.
“The Bank of Canada wants average core inflation at/near 2%, but it’s currently 1.67% and diving,” RateSpy said. “That’s noteworthy for borrowers given inflation expectations are a primary determinant of mortgage rates.”
And while the recent economic restart is bolstering optimism, the coronavirus is expected to leave a long shadow, similar to its impact on the nation’s purchasing power.
“Inflation’s descent may slow thanks to rebounding oil prices, but it’ll continue dropping … potentially to lows we haven’t seen in a few decades,” RateSpy said.
Volatility will remain the running theme even as the Canadian financial system inches its way back towards pre-pandemic conditions, according to Canadian Imperial Bank of Commerce.
“CIBC said it has yet to speak to an investor that thinks Canada will emerge from recession faster than in 2009,” RateSpy said. “At a minimum, it usually takes a couple years for inflation to rebound meaningfully above 2% following a recession, but with record unemployment this time, it could take longer.”
A silver lining is that the prolonged recovery phase will be supported by the Bank of Canada’s record-low interest rates, according to governor Tiff Macklem. But RateSpy stressed that it will be a long, hard road for the market.
“Two percent inflation is hard enough to sustain in an old economy facing over-indebtedness, an ageing population, technology-driven disinflation, etc. – let alone in a recession-ravaged economy where more than 10% of workers could remain unemployed or under-employed for years,” RateSpy said.
