The Bank of Canada hiked rates for the 8th time in 12 months in January and there is a strong likelihood that this will be their last increase of this rate cycle. While this is certainly a reason to celebrate, it's only one part of the problem.

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When will rates start going down?

When can we expect to see the first rate cut? Only when core inflation hits the 3-4% range. Right now, we're over 6% and inflation is proving to be very 'sticky'. In other words, it was relatively easy to knock off the first big chunk (the low hanging fruit) as it was largely tied to supply chain woes, Ukraine war energy fears and that sort of thing. Getting down to sub 4% inflation is going to take some time and effort. Until we reach this target, rates will be going nowhere. How long will it take us to reach sub 4% inflation? Likely, not until the end of 2024, at least.

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When will we see ultra low rates ala 2021?

Ok, so we've established that 2023 will likely be a year of rate stability with no further moves up or down (barring any Black Swans, of course). When we hit sub 4% inflation in 2024, we can expect a decrease or two. That's it. Why, you ask? The BoC has firmly stated that they will not be drastically reducing interest rates until we get core inflation back to 2%. Getting inflation down below 4% will be difficult. Getting inflation below 3%? A Herculean task. The main culprits? Onshoring (the end of cheap labour), scarce workers and ongoing wage pressures will all conspire to make the BoC's job that much more difficult.

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Will we ever see the return of the 1.99% 5 year fixed rate? Not in our lifetimes, my friends. These rates were the result of a once in a century pandemic event that took the world by surprise and flooded our economies with ridiculously cheap money. Those days are gone, however we can expect rates to return to a more normal 3-4% by 2025-26, I would predict.

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