Canada: BoC to hike next week despite higher than expected slowdown in inflation - RBC

Today’s data showed that Canadian inflation dropped to 2.2% (y/y), below the 2.7% expected. Josh Nye, Senior Economist at RBC Capital Markets, sees the Bank of Canada lifting the overnight rate to 1.75% next week.

Key Quotes: 

“Canadian inflation slowed more than expected, returning to a 2.2% year-over-year rate in September after hitting 3% over the summer. The spike higher in July and August largely reflected a jump in the transportation component with both airfares and gasoline prices rising.”

“That the summer’s higher inflation was largely noise is reflected in the BoC’s favoured core measures, which on average haven’t budged from a 1.9-2.1% range since February. That compares with a 1.5% average last year. Those numbers are key to the Bank of Canada’s assessment that the economy has been “operating near capacity for the past year.”

 “The BoC has indicated higher rates will be needed to keep inflation on target, and we expect they’ll act on that bias next week by lifting the overnight rate to 1.75%. With markets having priced in that move for some time now, focus will be on the pace of tightening going forward.”

“Even if the BoC goes for less explicit forward guidance, we don’t see them speeding up the pace of hikes. Household sensitivity to rising rates remains a key issue, and today’s inflation numbers allow the BoC to continue tightening at a manageable pace.”