October 19, 2023
Canadian inflation is decelerating again, leaving room for the central bank to hold interest rates steady next week.
The consumer price index rose 3.8% in September from a year ago, Statistics Canada reported Tuesday in Ottawa, slower than the median estimate of 4% in a Bloomberg survey of economists. It’s a reversal that comes at the right time for Bank of Canada policymakers, who will soon begin their deliberations for a rate decision on Oct. 25.
Governor Tiff Macklem and his officials paused rate increases in early September, saying they wanted to see how the economy evolved. A surprise second-quarter economic contraction and employment losses in July had allowed them to look past an early-summer uptick in inflation.
But then the headline rate of inflation rose again in August and the economy added 104,000 jobs over August and September, while wage growth for permanent employees accelerated. That prompted some economists and traders to speculate that another hike was imminent.
That pressure appears to be off, for now. Traders in overnight swaps pared their bets on another rate increase next week, falling from around 50% odds to less than 20%. Bonds rallied; the loonie fell sharply after the data release before rebounding.
“The level of inflation remains much too high for comfort, but the trend is the BOC’s friend here,” Benjamin Reitzes, a rates and macro strategist at the Bank of Montreal, said in a report to investors. “Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we’re likely to see ongoing disinflationary pressure.”
“There’s no need for further rate hikes in Canada,” he added. On a monthly basis, the consumer price index fell 0.1% in September, versus expectations for an increase of 0.1%.
Two key yearly inflation measures that are tracked closely by the Bank of Canada and filter out components with more volatile price fluctuations — the so-called trim and median core rates — also eased, averaging 3.8%, from 4% a month earlier.
A three-month moving average of underlying price pressures that Macklem has said policymakers are tracking fell to an annualized pace of 3.67%, from 4.29% a month earlier, according to Bloomberg calculations. The unexpected deceleration in inflation doesn’t fully offset the upside surprises of the past few months, said Andrew Grantham, an economist with Canadian Imperial Bank of Commerce.
“However, with activity in the economy stalling in Q2 and Q3, excess demand appears to be diminishing, suggesting that inflation should continue to decelerate in the quarters ahead without the need for further interest rate hikes.” On Monday, the central bank’s surveys showed that both businesses and consumers believe the full impact of rate hikes has yet to be felt, though inflation expectations remain elevated.
