How can the new inflation data affect the central bank’s rate decisions?

Different experts believe that the recent inflation results may give the Bank of Canada enough reasons for raising its key lending rate by 0.25% this month, though some say a rate hold can still happen.

The latest inflation results are good news for those with variable-rate products and those who are thinking about getting a fixed-rate mortgage in the nearest future.

Variable-rate and HELOC holders should prepare for a 0.25% hike. Meanwhile, they should be glad to see the inflation moving in the right direction, which may reduce further rate increases this year. Those who plan to take a fixed-rate mortgage during the next few months may want to think about shorter terms (2-3 years) and shopping around to find the best rate.

According to Statistics Canada, the national inflation level went down to 6.3% (annualized) in December, mostly due to gas prices declines.

Nevertheless, the lack of significant improvement in core inflation means that the central bank will probably follow its rate-hike trajectory, although at a more moderate pace.

“While the direction of inflation is slightly encouraging, there’s nothing in this report that could stop the BoC from raising its overnight rate by 0.25% next week,” – noted Benjamin Reitzes, macro strategist at BMO.

A stronger labour market seen last month, with 104,000 new jobs added, will force the Bank to step on the brakes harder, says Karyne Charbonneau, executive director of economics at CIBC.

“Such inflation numbers were quite expected, so I don’t think it will change the central bank’s plans,” -Charbonneau said.

 

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