Rate Increase Pressure Remains In Canada Due To Sticky Core Inflation




According to Statistics Canada’s data released on Wednesday in Ottawa, the consumer price index increased 6.8% from a year ago, beating the 6.7% estimate of economists and down from the 6.9% increase in October. 

In November, the index increased by 0.1% every month, defying expectations for no change. The data demonstrate that pricing pressures persist at high levels, notwithstanding the economic slowdown and the domestic demand being stifled by increasing borrowing costs. 

Tiff Macklem, the governor of the Bank of Canada, may raise interest rates once again in an effort to bring back price stability if inflation continues.

According to economist Veronica Clark of Citigroup Inc, the data supports a 25-basis-point rate rise in January. “I’m still planning on adding 25 more in the March meeting. The BOC is still primarily concerned about inflation, and it is evident that we are not yet heading in the direction they desire, she said on BNN Bloomberg Television.

The two-year benchmark yield increased by over five basis points from its pre-release level due to falling short-term bonds, reaching 3.711% at 10:04 a.m. Ottawa time.

The median core rate and the so-called trim rate, two important annual metrics widely monitored by the central bank, increased somewhat in November, averaging 5.15% compared to a positively revised 5.1% in October.

In a note to investors, Douglas Porter, chief economist of the Bank of Montreal, warned that “the persistence in core trends around 5% or higher points to the prospect of even additional rate rises later on”. “A major warning indicator of sustained underlying pressures is that several core inflation gauges are still trending upward.”

Canadian Economic Forecasts through December 2022 says that;

The CPI increased by 0.4% monthly after being seasonally adjusted, down from 0.6% in October.

Inflation increased in November as a result of food and housing costs. The cost of mortgage interest increased by 14.5%, the most since February 1983, while the rent index increased by 5.9% as rising interest rates created greater obstacles to house ownership. 

Following an increase of 11% in October, the cost of food purchased from retailers increased by 11.4% over the previous year.

The inflation figures, the first of two to be released before the Bank of Canada makes its next interest rate decision on January 25, show how higher interest rates, which are intended to slow the economy, are simultaneously driving up consumer expenses.

The central bank stated earlier this month that underlying pressures would be a significant factor in determining when interest rates will stop climbing and that economic data will be the primary guide for future rises. 

Most experts predict that Canada will experience a technical recession at the start of next year. Overnight swap traders increased the likelihood of a further 25 basis-point increase from roughly half before Wednesday’s data to about two-thirds after it was released.

About the author, Awais Rasheed

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