Resilient inflation hints at more interest rate increases in Canada

The latest report by Statistics Canada says the inflation rate slowed down slightly in November. However, the key measures of underlying price pressures continued to grow, potentially reducing hopes for a pause in the interest-rate hikes cycle.

The consumer price index (CPI) went up by 6.8% on a year-over-year basis, exceeding the economists’ forecast of 6.7%. CPI also rose by 0.1% from October, while experts predicted no changes.

According to the report, price pressures are still strong, even as the economy slows down and higher borrowing costs reduce domestic demand. The resilience of inflation may force the central bank Governor Tiff to raise the key lending rate again.

Citigroup Inc. economist Veronica Clark says the results point to a possibility of a 0.25% rate hike in January.  “I also predict another 0.25% increase in March. In my opinion, the Bank of Canada still focuses on curbing inflation, and right now we are not moving in the right direction,” – she noted. 

Two main annual measures tracked thoroughly by the BoC (trim and median core rates) were up from 5.1% in October to 5.15% last month.

“The fact that core rates are hovering around 5% or higher hints at the possibility of more rate increases, and no one is talking about it,” – Douglas Porter, chief economist at BMO said. “The fact that many measures of core inflation are still exceeding this threshold is an obvious sign of strong underlying pressures.”

On a seasonally adjusted monthly basis, CPI was up by 0.4%, following the 0.6% reported in October.

Shelter and groceries were the main drivers of inflation in November. Mortgage interest costs rose by 14.5%, marking the largest gain since February 1983. Meanwhile, the rent index went up by 5.9% as higher mortgage rates added more challenges to homeownership. Food prices in stores rose by 11.4% annually, following an 11% hike in October.

Earlier, the BoC said future increases would depend on economic data, and underlying pressures will play a key role in determining when it’s time to stop the hikes cycle. Now, most economists expect Canada to enter a technical recession at the beginning of 2023.

Following this report, overnight swap traders increased the odds of another 0.25% rate increase from about half to two-thirds.

As you know, the central bank has already raised its key lending rate by 4% since March to 4.25%.