Why Bank of Canada hike is not a done deal despite inflation ‘head fake’
Adapted From the Financial Post PostHaste article dated August 17, 2023 entitled ‘‘Why Bank of Canada hike is not a done deal despite inflation ‘head fake’’
– 2 minute read-
We were warned that the battle against inflation would get rough, but nonetheless, this week’s numbers were a gut punch for Canadians looking for interest-rate relief.
“There’s no sense sugar coating this one — it is not a good report for the Bank of Canada,” BMO chief economist Douglas Porter wrote after the data came out.
The Inflation Increase Beat the Forecasts of Bank Economists
Consumer prices rose 0.6 per cent in July, pushing the headline rate to 3.3 per cent, a big comedown from June when the reading (2.8 per cent) fell into the Bank of Canada’s target range for the first time in more than two years.
While a modest uptick had been expected, Tuesday’s data “blew the doors off economists’ forecasts,” said Randall Bartlett, senior director of Canadian economics at Desjardins.
It also pushed Canada’s inflation higher than the United States for the first time since before the pandemic.
How did this happen?
A couple of “idiosyncratic factors” drove the gain, including a spike in Alberta electricity prices and higher airfares and travel services, said Bartlett in a note entitled “CPI head fake masks cooling under the hood.” Gas prices played a role as they fell less on a year-over-year basis than they did in June.
The Canadian Economy Continues to Show Signs of Cooling
However, Bartlett argues that key measures that the Bank of Canada looks at showed signs of improvement. The Bank’s preferred CPI median and trimmed mean slowed slightly and its newest measure of core inflation which excludes shelter fell to 4.2 per cent annualized from 4.6 per cent in June.
“The modest slowing core CPI is a thin silver lining for policy makers in an otherwise strong CPI report,” said BMO’s Porter.
BMO economists like Desjardins’ believe the Bank of Canada would prefer to hold rates next month given that other data suggest the economy is cooling.
But “the inflation figures will make it a tougher call,” Porter said.
One of the main reasons the Bank began hiking again at the beginning of the summer was because of a bump-up in April’s inflation, he points out.
While the majority of economists expect the central bank to hold at 5 per cent next month, there are some in the hike camp. CIBC economists see a final 25-basis-point increase in September as likely.
Derek Holt, head of Scotiabank Capital Markets Economics, warns that the Bank of Canada is at “high risk of losing the fight” and needs to crush inflation with more rate hikes.
“If the BoC waits for the lagged effects, then it faces the high risk of losing as wages and expectations get out of hand,” he wrote in a note on the data.
For now economists will watch for the next piece in the puzzle. The reading on second-quarter gross domestic product comes out Sept. 1, giving the central bank something else to ponder before its decision Sept. 6.