Inflation data raise odds of smaller rate hike in December: economists

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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, risks still remain on that front, said one economist.

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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 within its target range of two to three per cent.

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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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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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.

“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.”

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.”

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