Canada: CPI release to indicate timing of next BoC rate hike - ING

All investors are awaiting Canada’s inflation data today, looking to see whether the numbers support a potential second BoC policy change, points out James Knightley, Chief International Economist at ING.

Key Quotes

“In July, disappointing inflation figures (1.3% YoY for the May period) did not sway the BoC’s hawkish stance, leading them to increase rates 25bp for the first time in 7 years. Gov. Poloz put the low CPI figure down to “temporary factors”, such as food price competition, automobile pricing and electricity rebates, adding that by mid-2018 “inflation should be well into an uptrend”. Since the hike, inflation hit a 20-month low of 1% YoY for the June period and when accounting for food and energy prices, core inflation remained well below the 2% target with both May and June CPI rising by 1.4%.”

“While oil prices rose through July, precious metals have dropped due to the slowdown in China’s demand and geopolitical uncertainty. The Canadian Real Estate Association also said that the national average prices for homes fell by 0.3% YoY, the first fall since February 2013. The market is anticipating continued weak inflation today.”

“Despite investors ramping up expectations for a second rate hike, Poloz has given no indication on timing, saying that what they’ve got to do now is “monitor how the economy responds to a higher interest rate”. Currently, the concern of higher borrowing costs for indebted households, the start of NAFTA talks and the strengthening of the CAD has led markets to believe that October could be when the Bank next chooses to hike, pricing it in at 70% compared to 40% for September. The CPI figure today could give an indication as to whether the economy needs swifter policy change, with the BoC being unlikely to increase rates any time soon if inflation shows no sign of a comeback.”