Another chance the Bank of Canada will hike again is greater than expected: Currency analyst
As Canadian inflation accelerated in August, higher energy prices are fueling price increases and complicating efforts by the Bank of Canada to restore price stability.
The headline Consumer Price Index (CPI) rose four per cent in August compared to a year earlier, Statistics Canada said Tuesday, up from 3.3 per cent a month earlier. On a monthly basis, Statistics Canada said gasoline prices rose 4.6 per cent as a result of production cuts from oil producing nations.
CENTRAL BANKS NEED TO CONSIDER OIL PRICES: EXPERTS
Going forward, the Bank of Canada will have to consider the impact of higher energy prices, Sadiq Adatia, the CIO of BMO Global Asset Management, said in an interview with BNN Bloomberg on Tuesday.
“The Bank of Canada has to decide, is energy going to stay at this level for an extended period of time, and if they do, then they have to think about potentially continuing to raise rates,” he said.
Adatia anticipates energy prices will go higher, and that is something central banks around the world will need to account for, he said. He still expects central banks to pause at upcoming meetings to evaluate “where energy stands” and to allow the economy to process past rate hikes, as well as to evaluate labour market conditions.
ANOTHER RATE HIKE?
As gasoline prices remain higher than the previous year, Charles St-Arnaud, chief economist at Alberta Central, said in a note Tuesday that he expects headline inflation to average nearly four per cent for the rest of this year.
“The question for the (Bank of Canada) will be what the second-round impact of higher energy prices will be on underlying inflationary pressures, and core inflation is likely to remain stickier than the central bank anticipated,” St-Arnaud said.
He said that “increased stickiness” within core CPI measures raises the chances that the central bank will raise its policy rate by the end of the year.
“The decision continues to hinge on whether the domestic economy slows, reducing excess demand, and whether we see some moderation in inflationary pressures,” St-Arnaud said.
In a note, RBC Economics said higher gas prices were the largest contributing factor to inflation growth in August, spurred by higher oil prices.
“Most of the acceleration in year-over-year price growth came from rising energy costs - gasoline prices edged above year-ago levels for the first time since January with oil prices boosted by supply caps from key major oil producers,” the note said.
Last week West Texas Intermediate (WTI) oil prices rose beyond US$90 per barrel following efforts by OPEC+ to reduce output.
NEXT MONTH ‘LIKELY GOING HIGHER’
Despite the outsized impact of higher energy prices on Canadian inflation, Doug Porter, chief economist at BMO Capital Markets, said in a note Tuesday it was not a surprise given the monthly rise in gasoline prices – and said he expects them to keep pushing inflation higher.
“The bad news is that here in September, (gasoline prices) are now running at more than 10 per cent above year-ago levels, so next month's headline reading is likely going higher,” he said in the note.
Porter said the recent developments have made the central bank’s job of restoring price stability “more interesting,” but “not in a good way.”
“We all knew that the extended back-up in gasoline prices was going to be a headache for headline CPI and inflation expectations, but the inconvenient truth is that core has suddenly heated up as well,” he said.