In Canada, the key measures of inflation increased more quickly than anticipated. Additionally, the overall rate also went up, mainly because of base effects. This highlights the tough last phase of the central bank’s efforts to bring back stability in prices and plan Canada rate cuts.
In December, the consumer price index in Canada went up by 3.4% compared to the previous year. This followed a 3.1% increase in the preceding month, according to Statistics Canada’s report on Tuesday in Ottawa.
The rise was influenced by gasoline prices dropping more in December 2022 than they did in the previous month.
Yet, two crucial yearly measures closely monitored by the Bank of Canada, which exclude more unpredictable elements—the trim and median core rates—rose to an average of 3.65%.
This marked a faster pace compared to an upwardly revised 3.55% a month earlier and surpassed economists’ expectations of a 3.35% rate.
Hence, in all these situations it will be hard for BoC to initiate any ideas about Canada rate cuts in the near future.
Following the release, traders adjusted their expectations, delaying predictions for when the central bank will start reducing rates from April to June.
Stephen Brown, an economist at Capital Economics, expressed concern, stating,
“The pick-up in underlying inflation pressures raises the risk that the Bank of Canada will need to keep interest rates higher for longer than markets are now pricing in, with the economy suffering further as a result.”
Key Metrics, Bond Yields, and Canadian Dollar Dynamics
In the context of potential Canada rate cuts, another pivotal measure closely monitored by the Bank of Canada, a three-month moving average of underlying price pressures, increased to an annualized pace of 3.63%.
This surge, as per Bloomberg calculations, contrasts with the 2.94% recorded a month earlier. The rise was predominantly influenced by higher rent and passenger vehicle prices, as identified by the trim core metric.
While potential Canada rate cuts spur, the yield on two-year government bonds increased by as much as six basis points post the release, reaching 3.893%. Simultaneously, the Canadian dollar experienced fluctuations before stabilizing at C$1.347 per US dollar just before noon Ottawa time.
This marks the final of two inflation reports preceding the Bank of Canada’s rate decision next week. While most economists anticipate the bank to maintain borrowing costs, there is an expectation of a series of rate cuts commencing in the second quarter.
Canada Rate Cuts Anticipated in 2024
In December, Governor Tiff Macklem cautioned about encountering a few “bumps” on the journey to reach the 2% inflation target. Despite this, in the previous month, the governor and officials maintained the benchmark overnight rate at 5% for the third consecutive meeting. Their decision was grounded in ongoing concerns about the outlook for Canada rate cuts.
According to Stuart Paul, a US and Canada economist, the anticipation is that softening economic conditions and a more relaxed labor market, combined with progress on disinflation, will prompt the Bank of Canada to implement The Canada rate cuts around mid-year. The projection is for the overnight rate target to conclude 2024 near 4.0%.
Leslie Preston, a senior economist at Toronto Dominion Bank, stated in a report to investors, “If you are looking for data to signal a rate cut is imminent, this isn’t it.” She emphasized that this leaves the Bank of Canada cautious in deciding when it would be appropriate to cut interest rates.
Despite this, she anticipates that inflation and the economy will have cooled enough by spring for the central bank to make its first cut of Canada rate cuts in April.
Surge in Mortgage and Rent Costs Impact Consumer Prices
In December’s report, shelter inflation continued to be the primary driver of year-over-year price gains, with past rate increases, a supply shortage, and high immigration levels pushing up prices.
Mortgage interest costs surged by 28.6%, and rent increased by 7.7%. Excluding shelter costs, the consumer price index rose by 2.4% from a year ago, compared to 1.9% in November.
Tu Nguyen, an economist at tax and consultancy firm RSM Canada, suggests that the bank should commence rate cuts as early as April. Nguyen argues that since the economy has slowed considerably and current inflation is primarily driven by shelter, maintaining higher rates for an extended period will not be beneficial.
Nguyen points out that the Bank of Canada cannot address the housing shortage directly causing high rent growth and increasing mortgage interest payments, as these issues are a result of monetary policy.
Mixed Trends in Services and Goods, Regional Variances, and Fuel Oil Impact
In December, there was a slowdown in services inflation to 4.3% from a year ago, compared to 4.6% the previous month. Meanwhile, goods inflation increased to 2.4%, up from a 1.4% rise in November.
The year-over-year purchase of passenger vehicles index rose by 2.3%, following a 1.5% increase in November. This increase was driven by higher prices for new passenger vehicles. Regionally, prices in nine out of 10 Canadian provinces grew at a faster pace compared to November, with the exception being Manitoba.
The acceleration in prices was contributed to by fuel oil, particularly in Atlantic Canada, where it is more commonly used for heating homes, resulting in more significant price gains compared to other regions.
In 2023, the consumer price index saw a 3.9% increase on an annual average basis, following the previous year’s 40-year high surge of 6.8% in 2022 and a 3.4% rise in 2021.