Economists react to the latest consumer price index print
The Bank of Canada has made it clear that any changes in interest rates will be data dependent, but how is the latest consumer price index data likely to influence its decision?
With the CPI print from Statistics Canada released Tuesday showing an uptick in the pace of price rises from 1.6% on a year-over-year basis in September to 2.0% in October – and on a monthly basis from a 0.4% decrease to a 0.4% increase - economists and the markets are uncertain on what the BoC may decide next month.
Gasoline prices were down 4% on an annual basis, way below the 10.7% drop in September. Shelter costs eased from 5% to 4.8% as the mortgage interest cost index slowed to 14.7% from 16.7% and rent costs were down to 7.3% from 8.2% year-over-year.
The Bank of Canada's preferred core inflation measures increased to 2.6% year-over-year on average, from 2.4% in September.
Traders switched from a roughly 50/50 chance of a jumbo rate cut to around one in three.
Pimco Canada’s Tiffany Wilding highlights that the gain in inflation is influenced by energy categories, the jump in annual property taxes, and rent costs. However, she expects that the BoC will opt for a rate cut of 25 basis points rather than the 50 basis points seen in October.
“[The CPI] report removes some of the urgency for the BOC to move back to a neutral stance,” she noted. “However, still subdued inflation (ex-mortgage interest), a negative output gap, and the ongoing weakness in the labour market suggest the BOC is likely to continue to remove its restrictive stance of monetary policy over the upcoming months.”
CIBC economist Katherine Judge still believes that there will be a 50-point cut in December given the slack in the economy, although she stresses that it’s a close call and will be informed by the labour market report on December 6.
BMO’s chief economist Doug Porter and his team have not wavered from their call for a 25bps cut in December, but he again highlights the importance of data including the GDP report for the third quarter next Friday which BMO expects will see a large upward revision “suggesting we'll need to see a truly tough jobs report to prompt another aggressive cut,” he said.
At RBC, Abbey Xu points out that the BoC’s last interest rate decision meeting minutes noted that “ups and downs” could be seen in inflation. “Our base-case assumes an additional 50 basis point cut to the overnight rate by the Bank of Canada in December,” she stated in her CPI reaction.
Meanwhile, James Orlando at TD expects a 25bps cut, dependent on the upcoming GDP stats.
