Shortly after the Bank of Canada began raising the overnight rate in March 2022, inflation started to move back towards its 2 percent target. However, if we exclude mortgage interest costs, which increased substantially following the rapid rise in the overnight rate, inflation returned to 2 percent much faster. In fact, inflation excluding mortgage interest costs fell below 2 percent for the first time in January 2024, seven months ahead of headline inflation, and five months before the Bank of Canada started cutting the overnight rate. For more on why this adjusted measure offers a better view of inflation’s direction during periods of significant overnight rate changes, see recent C.D. Howe Institute research.
