What do Tuesday's inflation numbers mean for the Bank of Canada ...
Economists say cooling inflation could mark the end of the Bank of Canada’s rate hiking cycle, though one warns that Canadians will feel the pinch elsewhere even as price growth declines.
Inflation came fell to 3.8 per cent in September, weaker than the 4.0 per cent forecasted by economists, according data released by Statistics Canada on Tuesday.
The slowdown comes after a lengthy period of elevated consumer prices, but Canadians are now battling with new financial pressures due to higher interest rates, according to Dylan Smith, senior economist at Rosenberg Research.
“I don’t think there will be a broad feeling of relief from consumers,” Smith told BNN Bloomberg in a television interview.
“I think they are feeling rightly quite squeezed, and this is another reason we think that an appropriate easing in financial conditions is probably due.”
Smith explained that Canadians are now battling lag effects from numerous interest rate hikes from the Bank of Canada, aimed at battling inflation. Higher rates have been moving through the economy and are now having a material impact in banking system and housing costs, Smith said
“The problem for the Canadian consumer is that now they are seeing costs building up elsewhere, especially on the mortgage side and the housing price side,” he said.
The central bank has set its benchmark interest rate at five per cent, a big jump from March 2022 when the hiking cycle began at 0.25 per cent. The next central bank rate decision is expected on Oct. 25.
It takes about 12 to 18 months to feel the effects of the first rate hike, Smith said, adding that Canadians have yet to feel the full extent of hikes so far.
“We’re just approaching it now, the main area of impact,” he said.
POSSIBLE END TO RATE HIKES
If inflation continues to cool, it could spell the end of the Bank of Canada’s rate hiking cycle, Andrew Grantham, senior economist at CIBC Capital Markets, wrote in a note to clients on Tuesday.
“With activity in the economy stalling in Q2 and Q3, excess demand appears to be diminishing, suggesting that inflation should continue to decelerate in the quarters ahead without the need for further interest rate hikes,” he wrote.
Grantham noted that September’s deceleration in inflation doesn’t offset the higher-than-expected inflation readings from previous months.
He also highlighted that Canada’s third-quarter annual inflation rate average of 3.7 per cent was still higher than the 3.3 per cent projection from the Bank of Canada's last monetary policy report.
Grantham’s colleague Avery Shenfeld, chief economist at CIBC Capital Markets, told BNN Bloomberg that "there is still work to do, but the key is that the economy is softening."
“We’re on the road to lower inflation if the economy remains as soft as it has been,” he said in a television interview.
Shenfeld said he expects the Bank of Canada will likely to pause on rate hikes following Tuesday’s inflation data.
“We really don’t want to keep raising rates, you’re going to have a recession if you do that,” he said.
The general consensus from economists tracked by Bloomberg called for a rate hold at five per cent on Oct. 25.
Tu Nguyen, economist with accounting and consultancy firm RSM Canada, agreed with that outlook.
“The (Bank of Canada) will likely not hike any further as weaker growth is expected through the year’s end,” she wrote in a note to clients on Tuesday.
Nguyen argued that softening consumer demand leaves less room for businesses to raise prices, and she expects this trend will continue in the coming months, even though inflation is expected to remain above three per cent.
“Energy and gasoline prices might cause headline inflation to fluctuate in the short run, but they will not alter the Bank of Canada’s discourse,” she said.
CANADIAN DOLLAR DROPS
The Canadian dollar fell half a per cent on the inflation news.
“The inflation miss triggered a selloff in the Canadian dollar today as the market re-adjusted its rate hike expectations for the (Bank of Canada),” said Jay Zhao-Murray, FX Analyst at Monex Canada.
In his view, Tuesday’s data settled the debate over what the Bank of Canada will do next week: it crushed the odds of a hike, he argued.
“Should inflation continue to cool, we anticipate downward pressure on the loonie to persist in the months ahead.”
