Slight upside does not change the narrative, it says
The latest inflation readings support the validity of the Bank of Canada’s cautious approach towards potential interest rate cuts, according to RBC Economics.
Canada’s annualized inflation rate was at 3.1% in November, which was unchanged from the October level. Statistics Canada attributed this static reading to higher travel prices being offset by slower price growth on food, along with lower prices for cellular services and fuel oil.
RBC said that while this result was a bit of an “upside surprise”, this does not change the narrative of inflation seeing a broad easing in Canada.
“Broader ‘core’ measures of price growth still improved in November and some of the largest contributors to near-term price pressures, namely mortgage interest costs and rents, actually eased by more than expected,” RBC said in its analysis.
“If anything, the release today serves as a reminder that inflation readings can still be ‘sticky’, and why we continue to expect a cautious approach as the BoC starts to think about when to begin cutting interest rates.”
RBC is anticipating the first central bank rate cuts to come by mid-2024, “contingent on further (but widely expected) softening in CPI readings in the months ahead.”
“The Bank pointed to many of its key variables moving in the right direction and inflation moving in the right direction,” said James Laird, Co-CEO at Ratehub.
— Canadian Mortgage Professional Magazine (@CMPmagazine) December 9, 2023
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Speaking to BNN Bloomberg, RSM Canada economist Tu Nguyen said that “monetary policy is the main driver of inflation at this point.”
“We expect four 25-basis point rate cuts in 2024, with further cuts in 2025 to reach 3%,” Nguyen said.
“In the new era of more fraught supply chains, higher labour costs, and more uncertainty, 3% is likely the neutral policy rate.”
