(Ottawa) Observers expect that the Bank of Canada will not increase its key rate on Wednesday due to the economic slowdown and a slight decline in inflation.
In September, the Consumer Price Index (CPI) fell 0.1%. It had increased by 0.4% the previous month.
The central bank last month kept its key rate at 5%, but still worried about price pressures, it opened the door to further increases.
“Economic data has been blowing hot and cold since the Bank of Canada’s decision to hold its key rate in September, but we expect a hike is unlikely given the current situation,” RBC deputy chief economist Nathan Janzen and economist Claire Fan pointed out in a note sent to clients on Friday.
The CPI experienced increases in July and August while measures of core inflation excluding transitory variations in inflation have not declined significantly in recent months.
The September drop should help to alleviate some concerns caused by price growth in the country. The CPI ultimately rose to 3.8%.
“We breathed a sigh of relief after the release of the latest inflation data,” says CIBC Managing Director and Senior Economist Andrew Grantham.
The Canadian economy stagnated during the second quarter. Economists expect this slowdown to continue through the end of the year and into early 2024.
The recent Business Outlook Survey does not contradict this trend. They “expect their sales growth to be moderate over the next 12 months,” notes the Bank of Canada.
The job market does not appear to be as strong as in 2022. The number of unfilled positions has fallen while the unemployment rate has exceeded 5.5%.
Statistics Canada reported Friday that retail sales fell 0.1% last August in the country, to 66.1 billion, as sales at new and used car dealerships declined during the month.
Rising interest rates are expected to continue to affect the Canadian economy as more and more households have to renew their mortgages at a higher rate and more and more consumers avoid spending.
“Less than 50% of Canadian mortgage borrowers have been exposed to higher interest rates,” Grantham warns.
Mr. Grantham believes the Bank of Canada should start asking itself when it will start cutting its key rate.
Uncertainty has increased since the start of the war between Israel and Hamas which threatens to destabilize the entire Middle East.
“What we are seeing globally is that inflationary risks have increased. There is the Middle East which risks igniting. Wars cause inflation. There’s no getting away from it,” Mr. Grantham recalls.
Central banks know this all too well: Russia’s invasion of Ukraine in February 2022 contributed greatly to the initial escalation of inflation.
Bank of Canada Governor Tiff Macklem says it is still too early to say whether the conflict will have an impact on the global economy.
“It’s way too early to tell. And it really depends on how much the situation escalates,” Macklem said.
The Bank of Canada is also expected to release its Monetary Policy Report which contains a baseline scenario for inflation and growth in the Canadian economy.
