Canada is still struggling with getting inflation back to the target: Macro strategist
April’s higher-than-expected inflation figures suggest further rate hikes by the Bank of Canada might not be out of the question, experts said on Tuesday.
Inflation rose to 4.4 per cent year-over-year in April, Statistics Canada reported Tuesday. The figure came in higher than the 4.1 per cent expectation from economists tracked by Bloomberg, and represents a rise from the 4.3 per cent rate reported in March.
The Bank of Canada has held interest rates at 4.5 per cent for the last few rate decisions, but CIBC economist Avery Shenfeld said the latest numbers could mean a return to interest rate hikes as soon as the central bank’s June 7 meeting.
“The risk of a return to rate hikes at the next (monetary policy report) release can’t be ruled out, as staying on hold is now very dependent on seeing a slowdown in the labour market,” Shenfeld said in a note published Tuesday.
Statistics Canada's next labour report is expected on June 9.
Eric Theoret, global macro strategist at Manulife Investment Management, said while Canada has performed better at bringing down inflation than some other countries, the latest inflation numbers show the fight to get inflation down to the two per cent target is far from over.
He said the Bank of Canada may hold rates steady in its next monetary policy decision, but Tuesday’s inflation numbers and strong recent jobs figures could prompt further tightening.
“I think it would be a neutral with the risk of a hawkish surprise,” he said.
Devlin Capital founder Ed Devlin, meanwhile, said he predicts the Bank of Canada will remain on hold for the next few decisions, and he considers further rate hikes unlikely at this point.
“I find it highly improbable they'll change policy,” he said in a television interview.
Theoret said the Bank of Canada is fighting back against market expectations for incoming rate cuts as well as against inflation.
That means the central bank will need to stay aggressive to convince consumers and markets that “the bias is for interest rate increases," he said.
“Elevated inflation means that central banks just can't come in to ease in the way that they have in the past, because they still have quite a lot of work to do in getting inflation back to target,” Theoret said in a television interview.
He said the figures will influence the Bank of Canada’s language in its communications with the public.
“Really making sure that consumers, businesses and the economy as a whole understands that the bias for interest rates is still to the upside, despite I think what many have interpreted as somewhat of an implied pause for both the Bank of Canada as well as the (U.S.) Fed.”
Devlin said he thinks some market watchers are getting ahead of themselves with rate-cut predictions, despite the rate of inflation coming down significantly from last year.
“The trend is really good … but I do think we have a lot of wood to chop,” Devlin said. “People who are talking about changes in policy imminently are probably jumping the gun.”
The central bank began its tightening campaign over a year ago, and Theoret said consumers are starting to feel the impacts.
Shelter costs rose 4.9 per cent annually in April, with mortgage costs in particular were 28.5 per cent higher than a year earlier. Rents were also 6.1 per cent higher.
Theoret said that speaks to how mortgage costs are “a very big component of the inflation narrative” that is hitting consumers particularly hard.