Odds of a 75-bps hike from the Bank of Canada just went up, economists say
Economists give their views on hotter than expected inflation data out today
September’s inflation numbers will give the Bank of Canada no reason to change its hawkish stance on interest rates, economists said, following the release of the data Wednesday morning by Statistics Canada.
tap here to see other videos from our team.
Odds of a 75-bps hike from the Bank of Canada just went up, economists say Back to video
The headline inflation reading decelerated to 6.9 per cent from seven per cent in August on a year-over-year basis. Analysts had expected 6.7 per cent.
However, the core CPI reading rose 5.4 per cent from a year ago after cooling slightly in August to 5.3 per cent.
Prices for food continued their trajectory upward with grocery costs swelling 11.4 per cent from the same time last year, the fastest pace in 41 years, says Statistics Canada.
Resource Centre
- Provided by HSBCProvided by HSBC
- Provided by HSBCProvided by HSBC
- Provided by HSBCProvided by HSBC
- Provided by HSBCProvided by HSBC
Here’s what economists had to say about the cost of living and what it means for the Bank of Canada’s interest rate announcement next week.
Stephen Brown, Capital Economics
“The Bank’s core CPI inflation measures were unchanged in September but, given that we expected a decline due to more favourable base effects, that probably increases the odds of another 75 basis-point hike next week, particularly when households near-terms inflation expectations have risen further.
With [Bank of Canada governor Tiff] Macklem also warning us about elevated consumer inflation expectations, and the data this week showing that housing starts in the apparently interest rate-sensitive construction sector surged in September, the data this week lead us to think that the bank is likely to press on with a 75 basis-point hike next week, rather than drop down to a 50 basis-point move.”
Douglas Porter, chief economist, BMO Capital Markets
“After peaking at 8.1 per cent in June, overall inflation eased another tick to 6.9 per cent last month. The result landed on the high side of consensus, although it still leaves Canada well below the latest loftier readings in the U.S. (8.2 per cent), the Euro Area (9.9 per cent) and Britain (10.1 per cent). Still, inflation remains more than double last year’s average pace.
Some details: Food prices have been a flashpoint in Canada and many other major economies, and there was little let-up again last month, with adjusted prices jumping 1.2 per cent month over month. Grocery prices rose 11.4 per cent, the fastest run since 1981. Besides food, strong moves in the month included a big rise in mortgage interest costs, homeowner repairs, and autos (latter is up 8.3 per cent year over year). Keep in mind that the solid adjusted rise of 0.4% on overall prices in the month was in spite of a 7.4 per cent drop in gasoline, and pump prices are headed for about an eight per cent rebound in the current month — pointing to a possible small back-up in headline inflation next month.
Bottom Line: Bluntly, inflation did not ease as much as anticipated last month, even as gasoline costs took a big step back. Underlying inflation remains extremely persistent and sticky at above five per cent. Combined with the BOC’s recent tough rhetoric, the recent weakness in the Canadian dollar, and the strong likelihood that the Fed hikes by 75 bps at the next FOMC, we are now expecting a like-sized 75 basis-point hike next week from the Bank. This would take the overnight rate to four per cent, and we suspect that will not be the end of it — pencilling in a 25 basis-point move in December.”
Royce Mendes, Dejardins
The persistence of inflation will have the Bank of Canada hiking rates further and will continue to see markets split between pricing in a 50 basis-point and 75 basis-point hike next week. We’re still leaning towards a 50 basis-point rate hike, with a follow up 25 basis points in December since we are beginning to see the effects of higher interest rates show up more clearly. And that’s probably just the tip of the iceberg.”
Karyne Charbonneau, CIBC Economics
“There will be some long faces at the Bank of Canada this morning as inflation cooled less than in expected.
This is the third consecutive deceleration in headline CPI driven mainly by the fall in gasoline prices. Given that those prices have since reversed, the next month could see headline inflation temporarily heading in the wrong direction again.
The Bank of Canada has clearly not slayed the inflation dragon yet, and is therefore set for another large increase in interest rates of at least 50 basis points next week.”
Charles St-Arnaud, chief economist, Alberta Central
“The recent trend in the CPI monthly changes suggests that inflationary pressures are losing momentum. As such, the three-month annualized change in most CPI components is below their year-on-year changes, except for food prices, suggesting that inflationary pressures may be close to peaking.
While inflation is decelerating, it remains well above the BoC’s target of two per cent, inflation expectations are rising, and inflationary pressures remain broad. With this in mind, we believe the Bank of Canada will continue to hike interest rates. In our view, the BoC will likely increase its policy rate by 50 basis points at the October meetings. However, with inflationary pressures continuing to broaden, as evidenced by the share of CPI components rising by more than five per cent and the median at 6.8 per cent, there is a risk the BoC could hike 75 basis points, front-loading some of the increase.”
Stephen Tapp, chief economist, Canadian Chamber of Commerce
“Canada’s headline inflation edged down for the third month in a row, dragged down by falling energy prices. However, these gains were largely offset by the continued rise of prices for food and services. Unfortunately, there was no progress on “core” inflation, which held steady at five per cent.”
Today’s lack of progress on inflation — together with BoC surveys released earlier this week which suggested that inflation expectations remain elevated —s hould be concerning enough for the Bank of Canada to deliver the 50 basis-point interest rate hike that markets are expecting next week.
Leslie Preston, senior economist, TD Economics
“It is great that headline inflation took a small step in the right direction in September, but underlying inflation pressures in core measures showed no signs of cooling down. The BoC has hiked interest rates 300 basis points so far this year, and the impact of that is starting to be felt in the economy, from housing to consumer spending. But, with the Bank of Canada’s (BoC) core measures of inflation more than two percentage points from the target range of one to three per cent, more cooling in demand is required. Today’s report emphasizes the need for a hefty 50 basis point hike next week in the BoC’s overnight rate. We expect the bank is getting closer to a pause on rate hikes, once it reaches four per cent by the end of the year. ”
• Email: gmvsuhanic@postmedia.com | Twitter: gsuhanic