December 21, 2023
Canada’s inflation rate unexpectedly held steady in November and economists say the print reinforces the Bank of Canada’s cautious tone around interest rate cuts.
Inflation came in at 3.1 per cent in November, with no change in the figure from the previous month, Statistics Canada reported on Tuesday. That was faster than the 2.9 per cent rate expected by economists, and higher than the Bank of Canada’s two per cent target rate. Craig Alexander, president of Alexander Economic Views and former chief economist at TD Bank, called the latest inflation reading “a bit of a disappointment” that may keep the Bank of Canada on the sidelines for longer.
TD’s current chief economist, Beata Caranci, said the figures align with Bank of Canada Governor Tiff Macklem’s cautious tone about “the stickiness of inflation.” “It also helps reinforce why we didn’t get the same tone out of the Bank of Canada that we’re getting out of the U.S. Federal Reserve, who is showing more comfort around the direction of their inflation numbers,” Caranci told BNN Bloomberg in a television interview on Tuesday.
Alexander said he believes interest rate hikes are off the table, despite the Bank of Canada’s inflation fears. “What we’re really debating about is when will central banks cut rates,” he said in a Tuesday television interview.
“I think that the Bank of Canada will want to see real definitive evidence that core inflation is heading down to the two per cent mark before they actually start to really provide any real interest rate relief.”
Craig Alexander
In an exclusive interview with BNN Bloomberg’s Amanda Lang set to air on Friday, Macklem predicted rates might begin to come down “sometime in 2024,” but did not provide a more detailed timeline.
SHELTER COSTS
Alexander made the case that the Bank of Canada should examine how its monetary policies are contributing to inflation – particularly when it comes to mortgage costs. Mortgage interest was one of the biggest contributors to November’s annual inflation increase, Statistics Canada said Tuesday, notching a 29.8 per cent increase year-over-year.
“If we remove the impact of shelter costs, specifically mortgage rates, the rate of inflation is only 2.2 per cent,” Alexander said. “Will the Bank of Canada see through its own impact on inflation? Because those higher mortgage costs are coming from the prior Bank of Canada rate hikes.”
Tu Nguyen, economist with accounting and consultancy firm RSM Canada, echoed that view in an emailed note on Tuesday, saying “monetary policy is the main driver of inflation at this point.” The Bank of Canada has raised its benchmark interest rate to five per cent from nearly zero in early 2022 in a bid to fight inflation. It held rates at that elevated level for its last three decisions.
Caranci said that the Bank of Canada could hypothetically “pivot their language” and shift their focus from core inflation readings to the more demand-driven price aspects of the CPI, but that shift is unlikely. “They have shown no inclination to do that. They are sticking with their main metrics,” she said.
WHEN WILL THE BANK OF CANADA CUT RATES?
TD Bank is forecasting the first Bank of Canada rate cut in April 2024 and a total decrease of 150 basis points by the end of next year, which Caranci noted is “a little bit more than the markets have priced in.”
“The economy has weakened quite substantially in Canada, and that should mean that the inflation numbers are going to have to break below that three per cent level as that excess supply continues to build up in the economy,” she said. “That’s the logic, we need the numbers to prove it.” Nguyen also expects the Bank of Canada to start cutting rates in the second quarter of 2024.
“We expect four 25-basis point rate cuts in 2024, with further cuts in 2025 to reach three per cent,” Nguyen said. “In the new era of more fraught supply chains, higher labour costs, and more uncertainty, three per cent is likely the neutral policy rate.”
Meanwhile, Alexander said he expects rate cuts are more likely to come sometime next summer, predicting it would be “several months” before the bank entertains cutting rates – though “a lot will depend on how the economy performs.”
“If we get more downside on the economy, I think the Bank of Canada will cut sooner,” Alexander said.
“If on the other hand inflation proves to be sticky and the economic weakness isn’t a contraction but rather is very flat or very meager growth, then I think the bank will stay on the sidelines.”
