Inflation, Interest Rates, and the Future of the Canadian Economy with Avery Shenfeld

Whether you're looking for a new mortgage, contemplating your investment strategy, or simply trying to make sense of the economy, join us for a conversation with Avery Shenfeld, Managing Director and Chief Economist at CIBC Capital Markets, to shed light on the recent interest rate cut, its expected impact on the Canadian economy, and what this means for consumers.

Here are three reasons why you should listen to this episode:

1. Find out what the recent interest rate cuts may mean for inflation and the Canadian economy.
2. Learn how inflation and interest rates may impact Canadian consumers.
3. Gain valuable insight into what economic changes Canadians can expect for the year ahead and into 2025.

Resources

• Visit CIBC for more smart advice
• Visit CIBC Capital Markets Insights Hub to access timely economic insights   

Episode Highlights

[02:50] Tackling Changing Interest Rates 

• After continuous interest rate hikes, interest rates were reduced from 5% to 4.75%.  However, this rate cut won’t have any significant impact on the economy immediately.
• The future decisions of the Bank of Canada will be key in achieving economic relief. Further rate cuts are necessary to reach an interest rate of around 3%.

[03:24] Avery: "It's not the first move that will matter, but it's really the follow-up from the Bank of Canada. We've got to get that short-term interest rate down to something like three percent or two and three-quarters."

Historically, Canada and the US differ in economic performance and interest rates. These reflect the differing needs of the two economies and the varying interest rates.

• While Canada’s initial rate cuts may weaken the Canadian dollar, there is no significant impact on the trade and consumer price index. 

[06:30] The Current Consumer Price Index and Impact of Inflation

• The majority of inflation from the past year was a result of global production issues from the COVID-19 pandemic. As goods became more available, prices started to increase.
• Shelter is the critical component of the Consumer Price Index (CPI). Rent inflation which has greatly increased may ease by 2025 due to revisions in government policies.
• Another aspect of the shelter component is mortgage interest costs. Cutting interest rates can lead to the reduction of the inflation of mortgage interest costs. By the end of 2025, Avery shares that “variable or short term mortgages will see substantial savings that will show up in that part of the inflation basket.”

[09:47] The Future of the Canadian and Global Economy 

• Avery states that the growth of the Canadian economy and the overall global economy is still sluggish.

[10:34] Avery: "The overall temperature of the global economy is not likely to be that vigorous in the balance of this year, where our hopes lie is really for 2025, after a sequence of interest rate cuts, not just in Canada, but in Europe, and eventually in the US as well."

Global growth and domestic demand improvement due to interest rate cuts can lead to a better year for the Canadian economy by 2025.

• In response to the higher interest rates, Canadians focus on saving an increasing position of their after-tax income and being more cautious about saving.
• The Bank of Canada’s goal was to encourage saving to slow consumer spending growth. This will contribute to the hopeful growth of the economy in 2025.
• With lower interest rates, people have more to spend. The biggest economic changes will impact the real estate market with increasing housing turnover and more spending.

[15:00] Investment Outlook for the Second Half of 2024

• The equity market has been doing well in the past years. However, equities are fully valued for the coming interest rate cuts and Avery advises caution for these assets.
• On the other hand, there is room for bond yields to decrease and result in better returns on fixed-income investments.
• Avery states that we’re now in a period of the usual backstop. The bond market can provide a good return and shelter for the slowing of the equity market.
• A traditional balanced portfolio offers shelter from the volatile market as interest rate cuts continue. 
• The expected economic recovery in 2025 should mean well for the stock market.

[17:16] What Canadians Need to Know About the Economy

• Looking at the big picture, the overnight interest rate is expected to go down to around 3%. Avery predicts that it will go lower than it is today, especially by the end of 2025.
• Inflation is a big c