Introduction to Inflation and Interest Rates
The Bank of Canada’s decision on interest rates is heavily influenced by the country’s inflation rate. Recently, Statistics Canada reported that the headline Consumer Price Index (CPI) eased to 2.2% year-over-year, which is slightly above the expected 2.1% and down from 2.4% in September. This change has significant implications for the Bank of Canada’s future decisions on interest rates.
Understanding the Inflation Report
The Bank of Canada’s preferred core measures, CPI-trim and CPI-median, also edged lower, with CPI-trim dipping 0.2 percentage points and CPI-median slipping 0.1 point. However, BMO chief economist Douglas Porter notes that the softer headline figure doesn’t tell the full story. Much of the relief, particularly from gasoline and food, was already expected. The new news is the persistent strength in insurance costs and a snap higher in cell charges.
Economist Views on the Report
Scotiabank’s Derek Holt argues that the details of the report don’t matter for policy at this stage, as the Bank of Canada has made it clear that they are sidelined at least for the next several meetings. CIBC’s Andrew Grantham echoes this view, adding that the outlook extends well beyond December, with no change in the overnight rate forecast through to the end of next year.
Market Reaction
Markets appeared to take the data in stride, with the 5-year Government of Canada bond yield practically unchanged throughout the morning from its open of 2.75%. This reaction suggests that the market is not expecting any significant changes in the Bank of Canada’s interest rate policy.
12-Month Change in CPI and CPI Excluding Gasoline
The 12-month change in the Consumer Price Index (CPI) and CPI excluding gasoline provides valuable insights into the inflation trend. The data shows that while the headline CPI has eased, several components continue to show stubborn strength.
A Mixed Bag of Data
Despite the easing in headline and core measures, driven by easing grocery and gas prices, several components continued to show stubborn strength. Homeowners’ home and mortgage insurance was up 6.8% year-over-year, rent inflation accelerated to 5.2% from 4.8%, and property taxes rose 5.6%. Passenger vehicle insurance premiums also climbed 7.3%, and cellular service prices posted their first annual increase in more than two years.
Underlying Inflation Picture
TD economist Andrew Hencic notes that the underlying inflation picture is similarly uneven. While the Bank of Canada’s preferred core gauges cooled in October, several of the older exclusion-based measures moved higher. On a three-month annualized basis, the same split held, with some heating up and others cooling off.
Policy Implications
The broader policy implications remain largely unchanged. This month’s report doesn’t change the story much, with inflation unlikely to fall below the lower end of the target band given ongoing supply-side disruptions, but also unlikely to sharply accelerate amid weak domestic demand. Markets reflect that view as well, with odds of another cut by April holding near 30%.
What Will It Take to Move the BoC Off the Sidelines?
With inflation largely matching expectations but several components still running hot, economists say the bar for additional easing has only risen. It would take a longer period of easing price pressures, combined with indications of economic growth deteriorating again, to bring the Bank of Canada back off the sidelines.
Conclusion
In conclusion, the recent inflation report suggests that the Bank of Canada is likely to hold its interest rate steady for the foreseeable future. While some components of the inflation rate are showing signs of easing, others remain stubbornly high. Economists believe that it will take a significant change in the inflation trend or a deterioration in economic growth to prompt the Bank of Canada to reconsider its interest rate policy. As a result, the overnight rate is expected to hold at its current 2.25% through to the end of 2026.
