Consumer Price Index - November 23, 2012

Canadian consumer price inflation was tame in October, registering just 1.2 per cent year-over-year.  The Bank of Canada's core inflation index, which excludes the eight most volatile components of the CPI like energy and food, rose 1.3 per cent in October, matching the rate from September.  Inflation in BC fell to just 0.5 per cent year-over-year. 

Very low core inflation suggests that the Canadian economy is still operating with a substantial amount of excess supply. So, in spite of a clear tightening bias, inflation running near the bottom of the Bank of Canada's target control range suggests that rising interest rates remain far off on the horizon. 

No surprises from the Bank of Canada this morning. The Bank left its overnight rate at 1 per cent, where it has been since September 2010.  The statement released this morning in support of the interest rate decision noted that while global economic headwinds continue to restrain economic activity, the Canadian economy is growing roughly in line with its production potential.  On inflation, the Bank sees core inflation returning to its 2 per cent target over the next 12 months. 

The Bank once again made clear that a gradual withdrawal of monetary stimulus may be become appropriate as excess supply in the Canadian economy is absorbed, but that such withdrawals would need to be weighed against domestic and global economic developments. Given ongoing uncertainty in the Euro-zone and the unresolved "fiscal cliff" in the United States, that caveat means that the Bank will likely hold off on raising rates until early 2013. We expect monetary tightening to proceed very cautiously, with perhaps a 25 to 50 basis points increase over 2013, bringing the Bank’s overnight rate to between 1.25 and 1.5 per cent by the end of next year.

No surprises from the Bank of Canada’s interest rate decision this morning. The Bank opted to keep its overnight rate at 1 per cent, where it has been for nearly two years.  The statement released in support of the interest rate decision noted that, in the Bank’s judgement, Canadian economic growth and inflation are unfolding largely as anticipated. A wave of risk aversion due to heightened anxiety over the Euro-crisis has sent Canadian bond-yields plummeting and market expectations for Bank of Canada rate increases have sharply reversed course. However, in today’s statement the Bank once again signaled to markets its preference for higher interest rates over the medium term and its intention to modestly withdraw stimulus as slack in the Canadian economy is absorbed.  

The  Bank also stated that any such withdrawal will be weighed against domestic and global economic developments.  In its last interest rates announcement, the Bank suggested that the Euro-crisis had moved from an acute to chronic phase. While this turned out to be a misdiagnosis, it does suggest that the Euro-mess does not have to be completed resolved for the Bank to begin tightening policy, but it does need to be stable.  At this point, with policymakers and politicians in Europe still struggling to put out a number of fires, it is difficult to see a clear path to a stable Europe in the coming months. Therefore, it is increasingly unlikely that the Bank will begin raising interest rates in late 2012, though it has certainly left that door open.

Canadian Consumer Price Inflation - May 18, 2012

Canadian CPI inflation registered 2.0 per cent (year-over-year) in April, a 0.1 point increase from March inflation of 1.9 per cent. The rise in consumer prices was led by transportation costs, including a 3.3 per cent rise in gasoline prices. In fact, Statistics Canada's gasoline Index reached a 4 year high in April. The Bank of Canada's core inflation measure, which excludes food and energy prices, rose 2.1 per cent in April, up from 1.9 per cent in March. Consumer prices in BC were 1.6 per cent higher in April (year-over-year), matching the increase in March. 

Today's CPI report, in combination with very strong Canadian employment growth in March and April, lends further support to the Bank of Canada's case for raising interest rates this fall. We anticipate at least one 25 basis point increase in the Bank of Canada's overnight rate between October and December this year. The one factor potentially delaying a rise in rates could be an increasingly likely Greek exit from the European Monetary Union. Such an event may roil financial markets enough to put BoC rate hikes off the table.

Canadian Consumer Price Inflation - April 20, 2012

Canadian CPI inflation registered 1.9 per cent (year-over-year) in March, a 0.7 point decline from February inflation of 2.7 per cent. The rise in consumer prices was slowed by more moderate growth in food and energy prices in March. The Bank of Canada's core inflation measure, which excludes food and energy prices, rose 1.9 per cent in March, down from 2.3 per cent in February. Consumer prices in BC were 1.6 per cent higher in March (year-over-year), down slightly from 1.7 per cent in February. 

The Bank of Canada made sure to emphasize the firmness of inflation thus far in 2012 in its interest rate decision early in the week. Today's CPI report confirms that core inflation, though lower this month, is still anchored very close to the Bank's target of 2 per cent. Stronger than expected economic growth in the first half of 2012, and better outcomes in the Canadian labour market, may put upward pressure on core prices which will further buttress the Bank's case for raising interest rates later this year.

Bank of Canada Interest Rate Decision - April 17, 2012

The Bank of Canada left its overnight rate unchanged at 1 per cent for the 13th consecutive meeting. In the statement accompanying the decision the Bank noted that economic momentum in Canada is slightly firmer than the Bank had forecast in January and that economic headwinds from the US and Europe have abated somewhat. However, the Bank still judges the continued accumulation of debt by Canadian households to be the biggest domestic risk facing the economy. The Bank further noted that the degree of economic slack has been smaller than anticipated in January and that the economy is now expected to return to full capacity in the first half of 2013. Given a more rapid return to full capacity, we may see rate increases sooner than the mid-2013 date that most economists have penciled in. Indeed, the Bank sounded a more hawkish note in concluding their statement on the interest rate decision, citing that a modest withdrawal of monetary stimulus may become appropriate given firmer underlying inflation. However, the Bank was careful to condition that any withdrawal of stimulus would need to be balanced against domestic and global economic developments. 

Our bias, and our modeling, still point to rates remaining at 1 per cent until the first quarter of 2013. However expectations of an increasingly hawkish Bank of Canada may start to get priced into long-term interest rates which could push mortgage rates higher in coming months.

Bank of Canada Interest Rate Decision - March 8, 2012

As anticipated, the Bank of Canada maintained its target rate at 1 per cent this morning. On inflation, the Bank noted that it " expects the inflation rate to decline as a result of reduced pressures from food and energy prices and ongoing excess supply in the economy." The Bank expects a weaker external outlook and the ongoing sovereign debt crisis in Europe to dampen Canadian economic growth in the near future. 

Although markets have been pricing in a rate cut of late, our baseline view is that the Bank of Canada is unlikely to move on interest rates absent a serious escalation of the Euro-zone crisis.

Even without an escalation of the Euro-crisis, 2012 will be a challenging year in the global economy. The uncertainty and austerity imposed in Europe will almost certainly cause much of the EU to fall into a recession. Moreover the fiscal drag from fading stimulus and further cuts to government spending will subtract from growth in the United States. Given these challenges, our current forecast is for the Bank of Canada to stay on the sidelines for much of 2012 with the possibility of a 25 basis point rate increase coming toward the end of next year.

Canadian Inflation - October 21, 2011

Canadian CPI inflation increased 3.2 per cent in September due to higher prices for gasoline and food which increased 22.7 per cent and 4.3 per cent on a year over year basis.  The Bank of Canada's core inflation measure, which excludes food and energy prices, rose at a rate of 2.2 per cent, the largest year-over-year gain since December 2008. Consumer prices in BC rose 2.4 per cent in September (year-over-year) following a 2.1 per cent increase in August.
 
Higher than expected core inflation in September is not likely to change the Bank of Canada's stance on monetary policy. Risks in the global economy are still strongly tilted to the downside and should keep the Bank sidelined for an extended period. We will get a better idea of what the Bank is thinking on inflation and the economy after the next interest rate decision on Tuesday, October 25.