Bank of Canada on tightrope as analysts expect February inflation jump

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People banking on an interest rate cut may not like the direction Canadian inflation is heading if analyst expectations prove correct.

Bloomberg analysts expect inflation to reaccelerate to 3.1 per cent in February when Statistics Canada releases its latest consumer price index (CPI) data on Tuesday, following a slowdown to 2.9 per cent year over year in January.

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CPI core-trim and core-median, the measures the Bank of Canada is most focused on, are forecast to come in unchanged from the previous month at 3.3 per cent and 3.4 per cent, respectively.

Policymakers made it clear when they held interest rates on March 6 that inflation remained too widespread and persistent for them to begin cutting.

Here’s what economists are saying about tomorrow’s inflation numbers and what they mean for interest rates.

‘Can’t afford missteps’: Desjardins Financial

The Bank of Canada’s preferred measures “have become biased,” Royce Mendes, managing director and head of macro strategy, and Tiago Figueiredo, macro strategist, at Desjardins Financial, said in a note on March 18, “likely overestimating the true underlying inflation rate.”

They said the central bank’s preferred measures of core-trim and core-median inflation are stripping out items in the CPI basket of components whose prices are decelerating negative five per cent to zero per cent, represented primarily by goods. After adjusting for the “biases,” they estimate the bank’s measures are more in the neighbourhood of three per cent — which is at the top of the bank’s inflation target range of one to three per cent.

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“If the Bank of Canada ignores our findings, officials risk leaving monetary policy restrictive for too long, inflicting unnecessary pain on households and businesses,” they said.

Markets have significantly scaled back their rate-cut expectations based on the central bank’s previous comments. Royce and Figueiredo are now calling for a first cut in June and cuts of 25 basis points at each of the four remaining meetings of the year.

“Given the tightrope Canadian central bankers are walking, they can’t afford any missteps,” they said.

‘Inflict too much damage’: National Bank

The danger exists that interest rates could end up hurting Canada’s economy more than intended, Matthieu Arseneau, Jocelyn Paquet and Daren King, economists at National Bank of Canada, said in a note.

“As the Bank of Canada’s latest communications have focused on inflation resilience rather than signs of weak growth, there is a risk that it will inflict too much damage on the economy by maintaining an overly restrictive monetary policy,” they said.

They argue there is already plenty of evidence pointing to the economy’s decline, including slowing gross domestic product per capita, which has fallen for six straight quarters. The jobs market is also on the fritz with the private sector having generated almost no new positions since June 2023, they added.

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“Moreover, business survey data do not point to any improvement in this area over the next few months, with a significant proportion of companies reporting falling sales and a return to normal in the proportion of companies experiencing labour shortages,” the economists said.

Despite all these signs of weakness, inflation is stalling, they said, adding it is being overly influenced by historic population growth and the impact of housing and mortgage-interest costs.

The trio expect very tepid growth for 2024 of 0.3 per cent.

Rising gas prices: RBC Economics

Higher energy prices likely boosted the main year-over-year inflation figure to 3.1 per cent in February, Royal Bank of Canada economists Carrie Freestone and Claire Fan said in a note.

Gasoline prices rose almost four per cent in February from the month before. But the pair believe a weakened Canadian economy and slumping consumer spending mean “price pressures in Canada are more likely to keep easing and narrowing (to fewer items in the CPI basket of goods).

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They are forecasting the central bank will make its first rate cut in June.

‘Unusual distortions’: Bank of Nova Scotia

The Big Six bank’s inflation prediction for February is an outlier.

Derek Holt, head of capital markets economics at the Bank of Nova Scotia, is calling for headline inflation of 3.2 per cent year over year and 0.7 per cent month over month, unadjusted, compared with Bloomberg’s analyst forecast for monthly CPI of 0.6 per cent.

The “key” for Holt will be whether the Bank of Canada’s preferred measures of core-trim and core-median “rebound from January’s soft readings,” he said in a note.

“I think they might, but won’t be fussed if it takes a little longer to get away from unusual distortions that pushed the readings lower,” he said.

Holt said he was wary of the drops in core-trim and core-median in January because they came off of very hot numbers in December.

“The Bank of Canada is searching for a more convincing trend. One month doesn’t cut it,” he said in a note on Feb. 20 following the release of January’s inflation data.

• Email: gmvsuhanic@postmedia.com

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