BMO says Bank of Canada is far away from solving the inflation issue

Canada’s inflation slowed down slightly in August due to a drop in gasoline prices. However, economists are sure it will take a long time to bring the numbers back to the central bank’s target level of 2%.

Although August reported a 7% annual inflation (less than 7.3% expected by economists polled by Bloomberg), it’s still more than triple the Bank of Canada’s target rate.

Gasoline prices were down by 9.6% last month, but Canadians were dealing with the pressures on everyday staples, with grocery prices rising by 10.8% ad marking the largest hike in 41 years.

According to TD Economics Managing Director & Senior Economist Leslie Preston, the recent inflation data is only a small step in the right direction, and we have a long way to go.

“A journey of a thousand miles starts with a single step. Canadian inflation took a single step in the right direction last month, but we still have a long way to go,” – she noted.

“The central bank has raised its key lending rate by 3% so far this year, and the economy is already starting to feel its influence. Nevertheless, we expect more slowing in demand, which should help bring inflation back to the target level eventually.”

TD, Bank of Nova Scotia and RBC expect 4% to be the peak to the current rate increasing cycle, meaning there’s still room for a 0.75% hike. As a result, the BoC will get further into so-called restrictive territory, where its overnight rate restrains consumer demand, and thus economic growth.

Although inflation has slowed down compared to its peak of 8.1%, providing the BoC with a moment to breath, BMO’s Benjamin Reitzes says it has only given the central bank a bit of relief.

“Policymakers will have only a short pause, as we are still too far away from inflation reaching its target level,” – he said.

“Inflation is still too high, and the pace of price increases hasn’t been restrained. The way to a moderate inflation will be long and winding, but this is a step in that direction.”