Canada: ‘Temporary’ inflation lull no barrier for the BoC - ING

The change in Canadian monetary policy on 12 July, which led to the strengthening of the CAD, may delay achieving the 2% CPI target, but the BoC are still likely to hike further, according to James Knightley, Chief International Economist at ING.

Key Quotes

“Both the CPI headline and core inflation have undershot the 2% inflation target over recent months, as CPI inflation averaged 1.4% in 2Q17. According to the Bank of Canada (BoC), the reasons behind this have been the increase in food competition, automobile pricing and electricity rebates, all of which they have deemed as temporary, and part of their rate hike justification. Strip these factors out and the BoC believe the ‘true’ inflation figure is close to 1.8%.”

“An increase in US oil production and a movement towards a new supply/demand balance has led to a decline in oil prices. With a barrel of Brent oil costing 10% less than it did in April, this has transferred into slower gasoline price inflation and electricity rebates from the Ontario government. These factors combined with the strengthening of the CAD and the significant slowdown of auto prices has led to the anticipation that inflation will slow down further, with the BoC expecting it to reach 1.3% in 3Q17. Today’s monthly figure could drop to 1.1%.”

“However, inflation is expected to rise in the medium term, with the Bank expecting inflation to hit 2% by the middle of 2018. This is partly due to agricultural prices rising, strengthening the currently weak food price inflation, the dissipation of the temporary shocks aforementioned and the absorption of excess capacity. CAD strength may limit external price pressures, but with the economy strengthening, employment rising and the housing market looking buoyant, we expect the BoC to raise rates once more this year with another 75bp of hikes looking possible for next year.”