Canada just got some good news on the cost of living front: our inflation rate for March fell to 2.3%. This was a surprise to many experts, and it’s the lowest it’s been in quite a while. But what does that really mean for you and your family? In this post, we’ll break down this news in plain language – no financial background needed – and explain how it might affect your mortgage, your savings and investments, and even the overall economy. We’ll also look at why this is seen as a positive sign ahead of the Bank of Canada’s next interest rate announcement, and talk about jobs and consumer confidence (how people are feeling about the economy right now). Let’s dive in.
Understanding the Inflation News in Simple Terms
First, let’s clarify what inflation is. Inflation is basically how much prices for everyday things (like groceries, gas, or rent) are rising over time. If inflation is at 2.3%, it means that, on average, things cost 2.3% more now than they did a year ago. Over the past couple of years, Canadians have seen high inflation – you likely felt it at the grocery store or when filling up your car, with prices shooting up fast. The Bank of Canada responded by raising interest rates to help slow down those price increases. That strategy seems to be working: inflation has slowed way down. To put it in perspective, a few months ago inflation was higher (for example, in February it was about 2.6%). Many thought it would stay around that level in March, but instead it dropped to 2.3%. This is very close to the Bank of Canada’s target of about 2% inflation, which is generally considered the “sweet spot” for a healthy economy. The bottom line? Prices are still going up, but much more gently than before. We’re not seeing the huge jumps in cost that we did last year. This is encouraging news for everyone, because it means the cost of living isn’t increasing as quickly. However, you might be wondering, “Great, so will my bills actually go down?” Not exactly – remember, a lower inflation rate doesn’t mean prices are dropping, just that they’re rising more slowly. But it does offer hope that our paycheques can catch up a bit and that future price increases will be more manageable. Now, let’s explore how this affects specific parts of your financial life.
Relief for Mortgage Holders and Borrowers
If you have a mortgage or any loans, you’ve probably been keeping an eye on interest rates this past year. When inflation was high, the Bank of Canada raised its key interest rate to help bring inflation down. Those rate hikes led to higher borrowing costs – meaning mortgage rates went up, and anyone with a variable-rate mortgage or a line of credit tied to the bank’s prime rate saw their payments increase. With inflation now cooling to 2.3%, there’s less pressure on the Bank of Canada to keep raising interest rates. In fact, this lower inflation rate is a strong signal that the Bank’s rate hikes might be paused – and that’s good news for anyone with a loan. Here’s how it could impact you:
Variable-Rate Mortgages: Over the past year, many variable-rate mortgage holders saw their monthly payments jump significantly. With inflation under control, the chance of another rate increase drops, so you likely won’t see your payment go even higher in the near term. It’s even possible (though not guaranteed) that if this trend continues, we could eventually see rates start to come down, which would lower those payments. But for now, consider it a welcome breather.
Fixed-Rate Mortgages (and those renewing): If you’re locked into a fixed-rate mortgage, you might not feel immediate effects since your rate is set until renewal. However, fixed rates are influenced by general economic conditions and expectations for inflation. The fact that inflation is dropping could mean that new fixed mortgage rates might stabilize or even dip a bit going forward. So if you’ll be renewing or shopping for a new mortgage later this year, there’s hope you won’t face as high a rate as you might have feared when inflation was soaring. Essentially, the outlook for mortgage rates is a bit calmer now than it was a few months ago.
Home Equity Lines of Credit and Other Loans: Many lines of credit, home equity loans, and even certain student loans or car loans have interest rates that move with the prime rate. With inflation in check, the prime rate is less likely to rise further. That means the cost to borrow on those credit lines won’t be increasing like it did last year. If you carry a balance on a home equity line or a variable-rate loan, you might not see another jump in interest on your statement. This makes it a little easier to plan your budget without worrying about another sudden spike in loan payments.
New Home Buyers: For those looking to buy a home in Ontario (or anywhere in Canada), the past year’s high interest rates have been a challenge. Higher mortgage rates reduce how much home you can afford for a given budget. Now, with inflation slowing, we’re likely moving into a period of steady or slowly improving interest rates. That could improve affordability a bit — either through slightly lower rates or simply through more stable rates that make it easier to plan your purchase. It might also boost confidence in the housing market, as both buyers and sellers adjust to the idea that the worst of the rate jumps are behind us.
In short, a drop in inflation is a welcome relief for anyone with debt, especially mortgages. Your monthly payments won’t keep climbing like they did when every Bank of Canada announcement seemed to bring another rate increase. While you probably won’t see your rates drop overnight, just knowing that the pressure is easing can help you breathe a little easier about your finances. Plain-language takeaway: Lower inflation = less chance of higher interest rates = a bit of relief for your mortgage and loans.
What About Your Investments and Savings?
You might be asking, “Okay, lower inflation is good if I owe money, but what if I’m trying to save money or invest? Does this affect my RRSP, my TFSA, or my stock portfolio?” The answer is yes, it can affect those, too – in mostly positive ways – and we’ll explain how. Savings (like bank accounts, GICs, etc.): When inflation was high (say 5-6%), it was frustrating for savers because even though savings accounts and GICs started paying more interest, the high cost of living was eating away at any gains. For example, if your savings account paid 4% interest but inflation was 6%, you were effectively still losing purchasing power – your money couldn’t buy as much over time. Now, with inflation around 2.3%, if your savings account is earning, say, 3% interest, you’re actually coming out ahead in real terms. In plain English, this means the money in your savings account is finally growing faster than prices are rising, so you’re not losing ground to inflation anymore. Also, if the Bank of Canada holds interest rates steady (or eventually lowers them), the interest rates on new GICs and savings accounts might go down a bit in the future. But for now, they’re still relatively high compared to recent years, and with inflation low, it’s a good environment for savers. Your emergency fund or down payment savings aren’t shrinking in value like they were when inflation was higher. That’s a win for anyone putting money aside for the future. Investments (like stocks and bonds): Inflation and interest rates are big factors in how the markets behave. When inflation was raging, the Bank of Canada kept hiking rates to fight it, and that created a tough environment for many investments:
Stocks: High inflation and rising interest rates can make stock markets nervous. Companies face higher costs, and consumers may cut spending, which can hurt company earnings. Plus, higher interest rates make borrowing more expensive for businesses and can reduce the appeal of stocks compared to safer investments. Now that inflation is back down near the target, the outlook for interest rates is more stable. This stability is generally a good thing for stocks. It doesn’t mean the stock market will suddenly boom (there are always many factors at play), but it removes some of the big uncertainty. Businesses like predictability. With inflation easing, companies can plan better and investors feel a bit more confident that the Bank of Canada won’t suddenly jack up rates again. In fact, calmer inflation could help the stock market find its footing and potentially improve, as investors start to anticipate that we’re past the most aggressive rate hikes.
Bonds and Fixed-Income Investments: If you have bonds in your portfolio (perhaps through a mutual fund or ETF in your RRSP), you might recall that rising interest rates last year caused bond prices to fall. (There’s an inverse relationship: when rates go up, existing bonds, which have fixed interest payments, become less valuable, so their prices drop.) The flip side is also true: when interest rates stop rising or start falling, existing bonds become more valuable. Now that inflation has cooled, the expectation is that interest rates won’t rise further and might eventually come down, which would be positive for bond prices. In short, bond investments could recover some value as the rate environment stabilizes. Meanwhile, for new bonds or GICs, interest rates are still relatively high, so you continue to earn solid interest income for the time being. It’s kind of a sweet spot: inflation is low, but interest rates (for savers) are still high.
Investments tied to the economy: Lower inflation can sometimes signal a slowing economy (since the Bank of Canada raised rates to deliberately cool things off). Some sectors of the stock market – like maybe technology or interest-sensitive sectors – could benefit from the prospect of lower rates, while others that rely on strong economic growth might still be waiting to see if the economy picks up. But overall, bringing inflation down is like removing a heavy weight from the economy – it gives the market breathing room. Investors don’t have to worry as much about runaway prices or drastic central bank moves, which makes the future a little more predictable.
In everyday terms, for your investments and savings: the financial environment is becoming more stable and favorable. Your savings aren’t being eroded by rising prices as much, and your investments aren’t facing the headwind of constantly rising interest rates. This doesn’t mean there won’t be ups and downs – there always are – but one of the big risks (surging inflation) is cooling off, and that’s reassuring news for anyone with a nest egg. If you’re not sure whether you should make any changes to your investments because of these developments, don’t worry. The key is usually to stick to a solid plan. But it’s definitely a good time to review your financial plan or investment mix, especially if the past year had you shifting to more conservative options due to the chaos. Now might be an opportunity to reassess with fresh eyes since the landscape is changing.
A Positive Sign Ahead of the Bank of Canada’s Next Move
Why are economists and financial advisors (like us) happy to see 2.3% inflation? Because it’s a positive sign just ahead of the Bank of Canada’s next interest rate announcement. The Bank of Canada (often just called “the Bank” or the “BoC”) meets periodically to decide whether to raise, lower, or hold steady on interest rates. Their goal is to keep inflation low and stable (around that 2% target) while also keeping the economy healthy. Over the last year, most of those announcements brought rate hikes – which, as we felt, made loans and mortgages more expensive. It was a bit painful, but those moves were aimed at wrestling inflation down. Now we have proof that this effort is paying off: inflation is almost back to normal levels. This puts the Bank of Canada in a good position. At their next meeting tomorrow, April.16th In fact, with inflation this low, some experts are even wondering if the Bank might consider a further rate cut. (A rate cut would mean lower interest costs on new loans and possibly some relief for variable-rate borrowers, as discussed earlier.) The key point is that the Bank likely won’t feel the need to make borrowing any more expensive.
Why is this so positive? Think of it this way: if the Bank of Canada was still worried about inflation, it would keep raising rates, which could really squeeze people with debt and possibly slow the economy too much. But if they’re confident inflation is under control, they can stop tightening the screws. We’re essentially avoiding further financial pressure on households and businesses. Stable or lower interest rates ahead would make it easier to plan major life decisions – like buying a house, financing a car, or investing in a business – without worrying that rates will jump again unexpectedly. Another aspect to consider is government and corporate borrowing. High interest rates not only affect individuals, but also businesses and governments which borrow money. When rates stabilize or drop, it reduces the cost of doing business and even the interest the government pays on its debt, which is healthy for the overall economy. It’s all connected. So, heading into the next Bank of Canada announcement, this low inflation number is like an “all clear” signal in one respect. It tells the Bank, “You’ve done your job on inflation; no need to hit the brakes any harder on the economy.” For everyday Canadians, that means we likely won’t see the cost of borrowing go up further, and we can start looking forward to the day when it might even get a bit cheaper. In other words, the worst of the squeeze might be behind us. Keep in mind, the Bank of Canada will also be looking at other factors (not just inflation) when making its decision – things like employment (are people working or are jobs being lost?) and overall economic growth. Let’s talk about those next, because they’re the other side of the coin.
The Job Market and Consumer Confidence – The Bigger Picture
While low inflation is great news, it’s important to peek at the bigger economic picture to understand what it means for the average person. Two big pieces of that picture are unemployment (the job market) and consumer confidence (how people are feeling about the economy). Unemployment: Canada’s unemployment rate is currently around 6-7% (roughly 6.7% as of March). What does that number mean? It means out of the active workforce, 6 to 7 people out of every 100 can’t find a job right now. To give some context, before the pandemic and before inflation spiked, our unemployment rate was extremely low – around 5%, which was near record lows. Over the past year, as the Bank of Canada raised interest rates to slow the economy down (and tackle inflation), we’ve seen unemployment tick up a bit. Companies facing higher costs and slower sales have been a little less eager to hire, and some have even had to lay off staff in the most affected industries. Now, seeing unemployment rise is never something to celebrate. However, it’s somewhat expected in this phase of the economic cycle. To get inflation down, we had to cool off an overheated economy, and that unfortunately tends to slow job growth somewhat. The good news is that at ~6.7%, unemployment is still relatively moderate by historical standards – we are not in a severe recession or anything like that. Many people are still employed, and jobs are being created in some sectors, but perhaps not as frantically as before. In fact, you might have noticed it’s a bit less crazy out there with job switching and hiring than it was when everything was booming a couple of years ago.
For everyday folks, this unemployment rate means you might hear of a few more people in your circle looking for work than when unemployment was 5%. It also means if you’re currently looking for a job, it may take a bit longer or require a bit more effort compared to the job-hopper’s market we had when unemployment was super low. The Bank of Canada will keep an eye on this – they don’t want unemployment to climb too high either. The ideal scenario is a Goldilocks situation: not too hot (inflationary, with labor shortages) and not too cold (high unemployment and recession), but just right. With inflation coming down, the hope is we can settle into that balanced zone.
Consumer Confidence: Now let’s talk about how people are feeling about the economy.
There’s something called consumer confidence, which is basically a measure of people’s optimism or pessimism about their financial situation and the economy at large. When people feel confident, they’re more likely to make purchases, big and small – buying cars, homes, appliances, going on trips, etc. When confidence is low, people tend to hold back on spending because they’re worried about the future (things like “Will I still have my job next year?” or “Is this a good time to be making a big purchase?”). Right now, consumer confidence in Canada has been on the low side. In fact, recent surveys (such as the Conference Board of Canada’s index) showed confidence took a real hit in March, even hitting record low levels. That tells us a lot: Canadians have been through a rough patch with high inflation and rising interest rates, and it’s left many feeling uncertain. When everything from groceries to gas was getting pricier each month and mortgage payments were shooting up, it’s natural that people felt anxious and cautious. Even though the inflation news is good, not everyone immediately feels that relief in their day-to-day lives. It might take time for this positive trend (lower inflation) to sink in and for people to believe that it’s here to stay. What are some signs of low consumer confidence? Maybe you or people you know have decided to postpone big purchases – for instance, holding off on buying a new car, or waiting a bit longer to upgrade something in your house. Perhaps fewer folks are dining out or taking vacations, choosing instead to save a little more, just in case. These are common reactions when confidence is down.
Essentially, many households are in “wait and see” mode. So, what do the unemployment rate and consumer confidence tell us together? They paint a picture of an economy that’s cooling off – which is exactly what was needed to tame inflation – but they also remind us that people are still feeling the effects. Jobs aren’t quite as plentiful as before, and Canadians are a bit wary about their finances right now. However, there’s a hopeful flip side: if inflation stays low (as it is now) and interest rates stop climbing, that stability can pave the way for confidence to build back up. When people see a few months in a row of calmer prices – and perhaps even hear news of interest rates possibly coming down – they’ll start to feel more secure. If your grocery bill isn’t a surprise every month and your mortgage payment hasn’t changed in a while (or has even gone down a touch), you gradually gain confidence to plan ahead. Over time, this can lead to folks feeling comfortable making those bigger purchases and investments again, which helps the whole economy. In summary, the current economic mood is cautious. Low inflation is a big positive and a sign of progress, but the job market and confidence levels show we’re not completely out of the woods yet. The Bank of Canada will consider these factors – they don’t want to strangle the economy now that inflation is better. In fact, they’re likely thinking, “Okay, mission mostly accomplished on inflation; let’s make sure we don’t hurt the economy more than necessary.” Which circles back to why they’ll probably hold off on any more rate hikes and may even give us a rate cut when the time is right.
Looking Ahead – We’re Here to Help
Overall, Canada’s inflation rate dropping to 2.3% is great news for regular people. It means the cost of living isn’t skyrocketing anymore, and we can all breathe a little easier when it comes to our wallets. This change can positively affect everything from the interest on your mortgage to the growth of your savings. It’s also a sign that the tough measures taken to combat inflation are working, which hopefully means no more big rate hikes from the Bank of Canada – maybe even some relief on that front in the future. That said, we know that all this economic talk can still feel overwhelming. You might be thinking, “Okay, inflation is down – but what should I do about it?” That’s where we come in. Harmer Wealth Management and The Harmer Group (our real estate team) are here to help you navigate what these trends mean for your personal situation.
If you’re a homeowner or looking to become one, our team at The Harmer Group can walk you through what these interest rate changes mean for your buying or selling plans. Maybe you’re wondering if it’s a good time to refinance your mortgage, or how much house you can afford now versus a year ago – we can help make sense of that.
If you’re focused on your financial plan, investments, or savings, Harmer Wealth Management is ready to chat about your strategy. Perhaps you have money in a high-interest savings account or GIC and you’re not sure if you should lock in a rate. Or maybe you’re considering investing more now that things seem to be stabilizing. We can offer personalized advice tailored to these new economic conditions, ensuring your money is working as effectively as possible for your goals.
Remember, financial news is important, but what really matters is how it affects you and your family’s goals. We pride ourselves on breaking down these complex topics into understandable insights and actionable advice. No question is too basic – if you’re curious about something like “Will my credit card rate go down?” or “Is now a safer time to invest my savings?” – we’re happy to answer those in a straightforward way.
Contact us today, and let’s talk about how we can help you make the most of this good news for your wallet, your home, and your future. — The team at Harmer Wealth Management & The Harmer Group
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