Data released on Tuesday showed a larger than expected decline in the annual Consumer Price Index in Canada that weigh on the loonie. Analysts at CIBC, point out that inflation remains above the Bank of Canada’s target, meaning that the central bank will likely raise interest rates further.
“Canadian inflation decelerated further in August, and unlike the prior month the move wasn't just a story of lower gasoline prices. Unadjusted headline CPI fell by 0.3%, with the annual rate easing to 7.0%, from 7.6% in the prior month (consensus -0.1%, 7.3% y/y). While gasoline was the main cause of the monthly drop in CPI.”
“While overall inflation remains well above the Bank of Canada's target, meaning that more rate hikes are likely in the cards, a clearer gap appears to be opening up between Canadian and US inflation trends which should bring a lower peak from the Bank of Canada than the Federal Reserve.”
“Inflation likely hasn't slowed far enough, or for long enough, to convince the Bank of Canada that further interest rate hikes aren't necessary. Because of that, we still see a peak of 3.75% for the overnight rate later this year. However, today's inflation readings, as well as other data highlighting a slowing Canadian economy, support the view that interest rates here should peak below what the Federal Reserve will need to do in the US in order to get inflation back to a 2% target.