BMO Economics outlines possibilities for the year ahead
Inflation will likely remain the dominant economic force in Canada this year, according to BMO Economics.
“Canada’s headline inflation rate slowed in November, but key core gauges mostly trended higher, suggesting underlying price pressures will remain persistent,” said Priscilla Thiagamoorthy, senior economist and vice president of economics at BMO.
In particular, shelter and food costs are exhibiting no signs of slowing, Thiagamoorthy said.
“Canadian producer price growth slowed compared to a year ago, but remains elevated,” she added. “Industrial product prices declined 0.4% m/m in November slowing the annual pace to a still-high +9.7%. Meantime, raw materials prices fell 0.8% m/m and were up 8.0% y/y, the lowest rate since January 2021.”
A 4.1% annual increase in Canadian average hourly earnings is also placing further upward pressure on inflation levels, Thiagamoorthy said.
What does this mean for Canadian interest rates?
Taking these trends into account, the Bank of Canada is likely to keep the benchmark overnight interest rate at around, or higher than, 4% for this year to help moderate economic activity, the International Monetary Fund has cautioned.
The rate is currently at 4.25%, the highest it has been in nearly a decade and a half.
“The key immediate priority is to bring inflation down without triggering a recession,” the IMF said. “The central bank should maintain a tight monetary stance to bring the inflation back to target and avoid de-anchoring of inflation expectations, and … it should continue clearly communicating its policy intentions.”
