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Canada’s annual inflation rate maintained its position at 3.1% in November, defying analysts’ predictions of a decrease to 2.9% from the 3.1% recorded in October. The unexpected stability prompted a reassessment by market players regarding the timeline for potential interest rate cuts by the Bank of Canada.
Statistics Canada revealed that the acceleration in prices of travel tours offset slower growth in food prices, as well as reductions in cellular services and fuel oil costs. As a result, expectations for monetary policy easing saw a decrease, with the likelihood of a rate cut next month dropping to 16.0% from the previous 21.4%. However, markets still anticipate the central bank to embark on easing measures, possibly commencing as early as April.
Michael Greenberg, Senior Vice President and Portfolio Manager at Franklin Templeton Investment Solutions, noted, “(The November release) suggests those rate cuts are still a little bit of a ways off, and the market might be getting ahead of itself a little bit.”
The impact of this data influenced the Canadian dollar, causing a 0.3% increase to C$1.3351 against the greenback, or 74.90 U.S. cents.
On a month-over-month basis, the consumer price index saw a 0.1% increase, contrary to the forecast of a 0.1% decline. Core measures of underlying inflation, CPI-median and CPI-trim, held steady at 3.4% and 3.5%, respectively.
Bank of Canada Governor Tiff Macklem indicated in an interview aired on BNN Television that interest rates could be subject to cuts next year, contingent upon the expected reduction in core inflation.
The persistently high increases in shelter prices, including a nearly 30% surge in mortgage interest costs and a 7.4% rise in rent, contribute significantly to the ongoing challenge of managing inflation.
Despite these considerations, the Bank of Canada has kept its key interest rate at a 22-year high of 5% in its last three policy meetings, emphasizing that it is premature to discuss rate cuts. The next rate announcement is scheduled for January 24.
Royce Mendes, Head of Macro Strategy at Desjardins, commented, “Today’s report represents less progress in taming inflation than we had expected… bond yields are rising as some of the most aggressive bets on rate cuts are getting pared back.” Desjardins retains the forecast that the Bank of Canada could begin trimming rates in April 2024.
In terms of specific sectors, food purchased from stores experienced a 4.7% increase in prices in November, a slowdown from the 5.4% recorded in October.
Meanwhile, energy prices fell by 5.7%, compared to a 5.4% decline in the prior month. Excluding volatile food and energy components, prices rose by 3.5% year-over-year in November, slightly surpassing the 3.4% rise observed in October.
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