Inflation data raise odds of smaller rate hike in December, economists say

inflation-data-raise-odds-of-smaller-rate-hike-in-december,-economists-say

But some still think the central bank will need to go above 4% before the hiking is done

Publishing date:

Nov 16, 2022  •  12 hours ago  •  4 minute read

7 Comments

Canadians paid 30 per cent more for lettuce but overall price growth in food slowed slightly in October. Photo by Getty Images Canada’s consumer price index held at 6.9 per cent in October, data showed Wednesday, and that could mean a smaller rate hike from the Bank of Canada in December, economists say.

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Statistics Canada said higher gas prices last month were offset by a slowdown in the growth of food prices. The latter rose 10.1 per cent in October from a year ago, compared with a 10.3 per cent increase in September.

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However, with the price of lettuce up a whopping 30.2 per cent from last year, just as an example, “risks” still remain, said one economist.

The Bank of Canada has raised its key interest rate six times since March from 0.25 per cent to 3.75 per cent in its battle to lower inflation back to its two per cent target.

Here’s what economists have to say about Wednesday’s CPI reading and what Canada’s central bank might do next.

Stephen Brown, Capital Economics “Headline inflation was unchanged at 6.9 per cent in October and the CPI-median and CPI-trim measures of core inflation increased, but the latter was mainly due to unfavourable base effects. It appears that the three-month annualized measures of core inflation that policymakers are now focusing on declined further, which would leave scope for the Bank of Canada to drop down to a 25-basis-point interest rate hike next month.”

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Article content Douglas Porter, BMO Economics “We’ll call this one a tie, as it matched consensus and held the annual inflation rate steady at just below seven per cent. Given the big run-up in gasoline prices, that’s not a terrible outcome. The modest ebbing in food inflation may also be a step in the right direction, although lettuce count the ways that risks remain on that front. For the Bank of Canada, the 6.9 per cent reading is a tad below their expectation for Q4 headline inflation (their latest call was 7.1 per cent), and keeps the debate over the next rate decision very much alive between 25- and 50-basis-point hikes. (Our official call is +50 bps; it’s under review.) Given that most measures of core inflation remain locked in a range around five per cent, we continue to believe that overnight rates will ultimately need to go above four per cent to eventually crack underlying inflation.”

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Article content Charles St-Arnaud, Alberta Central “Inflationary pressures remain broad, with almost 80 per cent of the components of CPI rising at more than three per cent year over year and more than 60 per cent at more than five per cent year over year. However, we note that both measures are marginally lower than the previous month, suggesting that inflationary pressures are no longer broadening.

Canada’s inflation surge stalls at 6.9%: What you need to know Kevin Carmichael: Why the Bank of Canada’s mandate renewal a year ago is causing Macklem headaches today “While inflation may be peaking, it remains well above the BoC’s target of two per cent, inflation expectations are rising, and inflationary pressures remain broad. With this in mind, we believe the Bank of Canada will continue to hike interest rates. In our view, the BoC will likely increase its policy rate by 25 basis points at the December meetings. However, with inflationary pressures remaining high and little signs of sustained deceleration in underlying inflation, there is a risk the BoC could hike 50 basis points.”

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Claire Fan, RBC Economics “Make no mistake, current inflation pressure are still too high and too broad for the Bank of Canada’s liking. But early signs of easing price pressures will give the BoC some confidence that interest rates are near levels that are restrictive enough to ensure inflation return back to target over time. We look for another 25-basis-point hike in December to bring the overnight rate to a terminal value of four per cent, though risks are still tilted to the upside.”

Michael Greenberg, senior vice-president, portfolio manager, Franklin Templeton Investment Solutions “After a few months of decline, headline inflation maintained its level and met expectations as higher gas prices kept the pressure on. More importantly, however, core measures of CPI increased somewhat and remained above the five per cent level. This will keep pressure on the Bank of Canada to continue on their inflation fighting path. The challenge is that monetary policy acts with a lag, economic data is starting to weaken, and the economy slowing, which suggests that inflation will eventually calm down. It’s a difficult balancing act; as raising rates too much could sink the economy and put undue pressure on consumers, but not doing enough to combat inflation would allow inflation to stay high and become entrenched also causing problems. Our view is that the Bank of Canada will err on the side of doing too much and hence we expect the Bank of Canada to maintain rates at fairly high levels for longer, which could cause some volatility in markets and challenges for the economy. Longer term however getting inflation under control is paramount to a strong and growing economy, and hence some pain today, however unfortunate, is necessary for a more prosperous economy later.”

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Article content Veronica Clark, Citi Canada Economics “While headline CPI rose a modestly-softer-than-expected 0.7 per cent month-over-month in October, with much of the boost related to a temporary rise in gas prices, the most important part of the October CPI report was the core inflation measures. The BoC’s preferred measures, CPI-median and CPI-trim, each rose on the month, averaging 5.1 per cent compared to 5 per cent in September. As the BoC has characterized core inflation as still-too-high, this solidifies our expectation for a 50 basis-point hike in December. Following December, we still see another 25 basis-point hike in each of January and March as core inflation is unlikely to fall substantially until Q2-2023, which would take policy rates to 4.75 per cent.”

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