Slower inflation suggests the Bank of Canada will keep interest rates on hold

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The Bank of Canada is taking a March break from raising interest rates after all.

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Canadian Statistics consumer price index rose 5.9 percent in January from a year earlier, down sharply from 6.3 percent in December, supporting the central bank’s bet that the worst burst of inflation since the 1980s may be behind us.

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The decline is significant as Bay Street began to wonder if Bank of Canada Governor Tiff Mackle had jumped the gun in January when he said he was ready to stop raising interest rates and assess whether he had done enough to curb price pressures.

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A few weeks later, new data emerged employment increased in January, suggesting the economy still has plenty of momentum — even if the central bank has never been more aggressive in trying to cool it. And last week there was evidence that inflation in the United States was hotter than expected at the start of the year, raising questions about whether it will be a similar story in Canada.

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But the latest figures from Statistics Canada suggest inflation is continuing to ease, just as the Bank of Canada said it would in January, when it raised its benchmark rate by a quarter of a point while vowing to keep it there, assuming incoming data showed that inflation was returning to its target of two percent.

The consumer price index, excluding food and energy prices, has risen 4.9 percent since January 2022, compared with a 5.4 percent year-on-year increase in December. This is significant because the headline inflation number is often affected by volatile commodity prices such as oil, grains and vegetables. “Core” prices, which indicate the underlying trend, appear to be falling, although not quickly enough to dissuade market participants that further interest rate hikes may be needed to really curb inflation. Two separate measures of core inflation that the Bank of Canada tracks to gauge the trend were also around five per cent, well short of the central bank’s target.

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“The Bank of Canada has clearly telegraphed an imminent pause in its tightening cycle, and today’s data should support expectations that there will be no action at the next meeting,” Karl Schamotta, chief market strategist at Cambridge Mercantile Corp., said on March 8. note to your clients. “However, underlying price pressures remain well above the institution’s target range, setting the stage for another quarter-percentage-point rate hike in the coming months.”

The headline number was somewhat flattered by what Statistics Canada called a “base year effect.” In January 2022, consumer price index it jumped 0.9 percent from the previous month, a relatively large increase driven by higher energy prices amid signals that Russia intends to invade Ukraine. Supply chains were also in disarray and housing prices were rising.

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This year the conditions are completely different. Energy and housing costs are lower and supply chains are relaxing. The consumer price index was up just 0.5 percent month-on-month, so the year-over-year comparison is necessarily lower than it was at this time in 2022.

The 0.5 percent month-on-month increase is a big jump from December, when the consumer price index fell 0.6 percent from the previous month. Statistics Canada said a 4.7 percent jump in gasoline prices was mainly to blame, so the sudden upward pressure should dissipate. That’s because Winter Storm Elliot caused a momentary supply shock by forcing the shutdown of refineries in the southwestern United States.

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