Strategic View: High for How Long?

How long can the Bank of Canada keep its policy rate at 5.00%? Central bankers will likely need to see the unemployment rate around 6.5% AND inflation at or below 3% to begin cutting rates.

A balanced labour market is a key ingredient for restoring price stability. As a result, they will likely wait until the vacancy-to-unemployed ratio falls to roughly 0.4 before cutting rates. That would be consistent with an unemployment rate of roughly 6.5%.

Policymakers will also need to see further progress on inflation before trimming rates, but won’t be sitting on the sidelines until price growth slows to 2% per annum. So long as our labour market threshold has been met, we believe the Bank of Canada could begin lowering the policy rate even with total inflation still hovering around 3%.