Canada's Inflation Rate Slows, Bolstering Bets On Early Rate Cut

  • Canada's annual inflation rate slowed significantly more than expected to 2.9% in January, and core price measures also eased, data showed on Tuesday, bringing forward bets for an early interest rate cut. Analysts polled by Reuters had forecast inflation to tick down to 3.3% from 3.4% in December.
  • It was the first time in seven months that headline inflation has dipped below 3%. This prompted money markets to hike bets for a rate cut in April to as much as a 58% chance from a 33% chance before the figures were published. The Bank of Canada's next policy announcement is March 6, and expectations are that rates will stay on hold at a 22-year high of 5%.
  • Month-over-month, the consumer price index was unchanged, compared with a forecast of a 0.4% rise, Statistics Canada said. The Bank of Canada targets inflation at 2%. Two of its three core measures of underlying inflation also edged down. CPI-median slowed to 3.3%, the lowest since November 2021, while CPI-trim decreased to 3.4%, the lowest since August 2021.
  • The three-month annualized rate of the combined figures decelerated to 3.2% in January from 3.6% in the prior month. The BoC said last month its thinking had shifted to how long rates must stay at the current level. At the same time, it did not completely rule out another rate hike, citing persistence in underlying inflation.
  • "The key takeaway here is that Bank of Canada can seriously consider cutting rates," Doug Porter, chief economist at BMO Capital Markets, said. The BoC projects headline inflation will remain around 3% in the first half of 2024, before cooling down to 2.5% by end-year.
  • The central bank said last month that while interest rates had helped to bring down overall inflation, which touched a peak of 8.1% in June 2022, similar to the U.S., categories like shelter costs have fed underlying pressures. Shelter price inflation accelerated to 6.2% in January from 6% in December. Rental inflation continued to show upward momentum and accelerated to 7.9% in January from 7.7% in December.
  • "The Bank of Canada will likely remain cautious in the face of still-strong wage gains, firm services prices, and the reality that core inflation is still holding above 3%," said Porter from BMO.

(Source: Reuters)