Is the Bank of Canada winning its war on inflation?

Canada’s central bank has set rampant inflation squarely in its sights with a series of rate hikes throughout 2022 – and the latest data from the national statistics agency indicates that its approach may be having its desired impact.

After surging to a four-decade high during the summer, the annual rate of price growth has now slowed in two consecutive months, falling from that June peak of 8.1% to 7.0% in August, according to Statistics Canada.

The Bank of Canada sounded a cautious note on the news, with deputy governor Paul Beaudry indicating in a speech in Waterloo that inflation was still too high – although it was “headed in the right direction.”

There’s still much to do to return inflation to the central bank’s target level of 2%, according to RateHub.ca co-founder and co-CEO James Laird (pictured top), who told Canadian Mortgage Professional that the monthly decline in price growth was still welcome news.

“We’re very early in this fight. Maybe step one has happened in that it’s stopped going up and step two is that it’s gone down a little bit, but there’s a long way to go,” he said. “We’re still at 7%, [with] a long way to go to get down to 2%. But at least it stopped going up.”

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Soaring gas prices have contributed heavily to Canada’s inflation crisis in 2022, but there was some welcome news on that front with StatCan’s announcement that the cost of gas declined by 9.6% month over month in August (despite surging by 22% on a yearly basis).

Annual price growth without gas prices factored in also declined slightly, from 6.6% in July to 6.3% last month, although food prices hit their fastest pace of yearly growth since 1981 – rising by 10.8% compared with August last year.

That’s a worrying development, according to Laird, especially because there’s little that Canadians can do in terms of dramatically changing their habits on food purchases.

“Fuel and some of the other things that go into inflation, you can change behaviour on, [but] every family out there has to buy food,” he said. “So I think that’s still pretty concerning, and probably the most important part of the goods that [StatCan] have looked at.”

The news on inflation arrived about two weeks after the Bank of Canada announced its latest policy rate hike, a 75-basis-point jump that means that rate has now increased by 3% since March.

Beaudry said the Bank would “continue to take whatever actions are necessary” to stabilize prices and continue pushing inflation back towards the 2% target.

That seems to indicate that further hikes are almost certain, with the central bank having also said in its September statement that it anticipated more rate increases would be required to further puncture the inflation bubble.

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Such language was consistent with the Bank’s language on interest rates throughout the year – although it also hinted that an end to rate hikes could be in sight, stating that it “will be assessing how much higher interest rates need to go to return inflation to target.”

That means the Bank could be ready to pause at some point in the near future to assess the effects of what they’ve done in the year to date, according to Laird.

“I think there was at least a hint that the end could be coming. It’s obviously dependent on data as it comes in. But I did make that note that they softened their stance a little bit, even though they continued with their ‘rates will need to go higher’ [rhetoric].”

After leaving its benchmark rate untouched for nearly two years, the Bank has made a habit of announcing so-called oversized hikes in 2022 – including two half-point increases in April and June, a 1% jump in July, and September’s 75-point bump.

A quirk of the current extraordinary economic climate is that the market has become almost desensitized to those larger rate increases, which have essentially become the norm throughout the year to date.

“We’ve looked at [a] 1% [increase] recently, so less than that, relatively speaking, looks small,” Laird said. “Another way of saying that is 50 or 75 [basis points] now seems like a normal rate adjustment as opposed to an oversized adjustment.”