Data released on Wednesday showed the annual inflation rate in Canada eased less-than-expected from 7.0% to 6.9%. Analysts at CIBC now believe the Bank of Canada (BoC) will need to with a 75 basis points rate hike next week, against the 50 bps previously anticipated.
“There will be some long faces at the Bank of Canada this morning as inflation cooled less than expected. Unadjusted headline CPI increased 0.1% in September, with the annual rate easing only one tick to 6.9% (consensus -0.1%, 6.7% y/y). This is the third consecutive deceleration in headline CPI driven mainly by the fall in gasoline prices.”
“Given that those prices have since reversed, the next month could see headline inflation temporarily heading in the wrong direction again. But that is not the main focus for the Bank of Canada, who is paying closer attention to core inflation. CPI excluding food and energy rose by 0.4% seasonally adjusted on the month, faster than last month, and at a pace that's too high to be consistent with the 2% target.”
“The Bank of Canada has clearly not slayed the inflation dragon yet and is therefore set for another large rate hike next week. The pace of growth in seasonally adjusted inflation excluding food and energy picked up by more than expected this month and is too high for comfort. As such, we now believe the Bank will need to go with a 75 bps hike next week rather than the 50 bps we previously anticipated. The Bank might then be left with a last 25 bps in December if growth numbers support it.”