CPI print could help BoC justify higher for longer rates
The Canadian Consumer Price Index (CPI) rose by 3.1 per cent on a year-over-year basis this past November, hitting the same pace as October. This latest CPI print is higher than the 2.9 per cent that analysts predicted and still sits above the Bank of Canada’s 2.0 per cent target.
According to Statistics Canada high prices for travel and tourism drove CPI higher. Energy, and cellular services grew at a slower pace. So-called “core inflation” — CPI excluding food and energy — grew at an annualized rate of 3.5 per cent.
While analysts still noted that inflation is slowing over three-month averages, the November print coming in higher than expected may pour cold water on hopes for an interest rate cut coming early in 2024.
“The Bank of Canada has acknowledged the next move in rates is likely lower but have said they need to see “not one or two months” but “a number of months” of deceleration in inflation before cutting interest rates,” says Michael Greenberg SVP & portfolio manager at Franklin Templeton Investment Solutions. “This suggests that rate cuts are still a little way off and markets may have gotten a little ahead of themselves.”
Read more: About a third of Canadians set to cut back on spending in 2024 due to cost-of-living crisis
Greenberg noted that service costs are still “sticky” and while he reiterated that the three-month moving average of core inflation has continued to come down, we remain outside the BoC’s preferred range of 1 per cent to 3 per cent.
Mortgage interest costs rose by a staggering 29.8 per cent, while food purchased from stores is up 4.7 per cent and rent is up 7.4 per cent.
The 4.7 per cent increase in food costs represents a slowdown for those essentials, after October’s annualized increase of 5.4 per cent.
Read more: How can advisors help struggling small business owners now?
Brooke Thackray, research analyst at Horizons ETFs, agreed with Greenberg in noting that the Bank of Canada will likely want to see more sustained drops in CPI before any interest rate cutting cycle can begin.
“Investors are anxiously looking for an inflation trend lower, but today's stronger than expected data shows that a trend lower is in question,” Thackray says. “The Bank of Canada's forecast is for inflation to remain close to 3.5% through the middle of next year. From the Bank of Canada's viewpoint, they will probably want to see a much more established trend of lower inflation rates for longer before embarking on a rate cutting trend. The Bank of Canada is still expected to start cutting its key interest rate in the spring of 2024, but today's inflation data helps the Bank of Canada justify its current tight monetary policy.”
