The Bank of Canada (BoC) has recently released its latest inflation data
Canada’s inflation rate inched up to a new 31-year high in April, causing many observers to suggest the Bank of Canada is now more likely to deliver two back-to-back half-point rate hikes in June and July.
On Wednesday, Statistics Canada revealed that its headline Consumer Price Index rose to 6.8%, driven largely by increases in food and shelter costs. The Bank of Canada’s preferred measure of core inflation, which removes some of the more volatile items, rose from 3.93% in March to a 32-year high of 4.23% in April.
“The fact that headline inflation stepped up even a wee bit to yet another multi-decade high in a month when pump prices briefly relented and the base effects were helpful speaks volumes,” BMO economist Doug Porter commented.
One positive sign, however, is that there isn’t yet evidence of a rise in inflation expectations, which can become a self-fulfilling prophecy and serve to drive inflation higher, CIBC economists noted.
The last time that happened in the 1970s, “consumers, fearing further price increases, brought forward purchases, which spurred demand and caused inflation to rise even further,” the CIBC economists wrote.
“Today, consumers are telling us that they aren’t behaving in the same way, although, as well as being a sign of grounded inflation expectations, that could also be because households had already brought forward goods purchases during the pandemic.”
The Bank of Canada (BoC) has recently released its latest inflation data. The annual inflation rate was 2.4% in September, down from 2.5% in August. This is the first time the rate has been below 3% since November 2017. The main contributors to the decline were gasoline and clothing prices.
The BoC expects inflation to stay below 3% until the second half of 2020, due to lower energy prices and a weaker Canadian dollar. This should provide some relief for Canadian consumers, who have been dealing with higher-than-average inflation rates over the past year.
The BoC will continue to monitor economic data and adjust its monetary policy as necessary to keep inflation close to its 2% target.
What is the current state of inflation in Canada?
Inflation rates in Canada have been on a steady incline for the past few years. The current rate of inflation is at 2.4%, which is above the Bank of Canada’s ideal target range of 1-3%. This has caused some concern among policymakers, as it could lead to increased borrowing costs and slower economic growth.
The main drivers of inflation in Canada are food and energy prices. Food prices have been increasing at a rate of 3.7% per year, while energy prices have been rising by 5.8% annually. These increases are partly due to the weak Canadian dollar, as well as higher global commodity prices.
So far, the Bank of Canada has been able to keep inflation within its target range by raising interest rates.
What factors could lead to future rate hikes?
- Inflation has been creeping up in Canada, and that could lead to future rate hikes.
- The Bank of Canada is keeping a close eye on inflation, and if it continues to rise, the bank could raise rates to cool down the economy.
- Higher rates could lead to a slowdown in the housing market and increased borrowing costs for consumers and businesses.
- So far, the Bank of Canada has been reluctant to raise rates, but that could change if inflation continues to climb.
How could the latest inflation data impact these rate hikes?
The Bank of Canada released its latest inflation data on Wednesday, and it came in below expectations. The data could impact the bank’s decision on whether to hike interest rates next week.
Inflation was measured at 1.6 per cent in March, down from 2.0 per cent in February. The bank had predicted that inflation would be at 1.7 per cent in March.
The lower-than-expected inflation number could give the bank reason to hold off on a rate hike next week, especially given that the economy has been slowing down in recent months. There is also speculation that the U.S. could hike interest rates as early as next month, which could further impact Canada’s economy.
“There is no clear case for a rate increase at this time,” said Royal Bank of Canada economist Josh Nye in a note to clients Wednesday.
Conclusion
What does this all mean for the Bank of Canada, whose job it is to maintain an inflation rate within its target range of 2% to 3%?
“With both growth and inflation tracking above forecasts when the ink is barely dry, it may drive a further sense of concern at the Bank of Canada toward expediting rate hikes,” noted Scotiabank economist Derek Holt.
In its latest forecasts released in April, the Bank of Canada anticipated headline inflation of 5.6% in the first quarter and 5.8% in Q2.
“Q1 landed at 5.8% y/y and Q2 is so far tracking 6.8% based solely upon April’s reading,” Holt noted.
As a result, markets and economists are in agreement that the Bank of Canada is likely to deliver another half-point rate hike at its June 1 meeting, potentially followed by another in July.
If that were to happen, prime rate would likely rise to 4.20%, lifting rates for variable and adjustable-rate mortgages, as well as lines of credit.
“Governor Macklem has said 50bps will be considered at the June 1 meeting, which is our forecast. He has also said he wishes to return to neutral fairly quickly,” Holt added. “If I were them, I would not be as confident in ruling out the need for a bigger move
in June.”For variable-rate mortgage holders concerned about future rate hikes, reach out to a broker who can go through your options.
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