Morning Market Brief November 27, 2024

Declining prices might not be the answer

In a speech yesterday from Charlottetown, Bank of Canada (BoC) Deputy Governor Rhys Mendes discussed the importance of the BoC’s 2% inflation target. While questions have been raised about whether the BoC should allow prices to decline for a period, Mendes pushed back on that, citing several risks. Inflation surged higher in recent years, reaching decades-high levels. Central banks responded by cutting interest rates, and now, as inflation comes down, these central banks have shifted to lowering interest rates.

• BoC Deputy Governor Rhys Mendes says allowing prices to decline could put Canadians in a more difficult position. To push prices lower, the BoC might need to keep interest rates relatively higher, which could weigh on the financial position of many Canadian households.
• Mendes reiterated the importance of the BoC’s inflation target, which aims to stabilize prices in the Canadian economy.
• Falling prices might also change consumers’ expectations, according to Mendes. If prices were to fall, consumers might begin to expect even lower prices, which might lead them to delay purchases. In response, businesses could be forced to further lower prices. This cycle would make it difficult for the BoC to get inflation back to its 2% target.
• The BoC makes its next interest-rate announcement on December 11. Canada’s annual inflation rate moved higher in October but has trended downward over the past year. The BoC will monitor incoming data to determine what actions are needed to keep inflation at its target.

Mendes has reiterated the importance of the BoC’s 2% inflation target, while noting the central bank isn’t willing to move off of that, even for a short period of time. Doing so, particularly letting prices decline, presents risks to the Canadian economy, households and businesses. The BoC holds one more meeting in 2024, where it is expected to cut interest rates again.

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