A 30% chance of a rate hike in September seems about right: Chief economist
Despite a subtle jump in inflation for the month of July, economists are expecting the Bank of Canada to pause interest rate hikes in September, at least temporarily.
On Tuesday, Statistics Canada reported Canada’s annual inflation rate rose to 3.3 per cent for July, largely due to increased gas prices.
The inflation data marks a jump from June’s rate of 2.8 per cent, but experts say the hike was expected.
“We thought that inflation would come in a little bit higher, and this is because of the base effects. You’re dropping off some really low numbers in the back half of last year that is going to make inflation look like it’s accelerating, but in reality it’s not,” Philip Petursson, chief investment strategist with IG Wealth Management, told BNN Bloomberg on Tuesday.
In July, the Bank of Canada hiked interest rates to five per cent in its bid to tame inflation back down to its target of two per cent.
Petersson argued that a good portion of inflation figures are elevated because of the heightened interest rates themselves. For him, Tuesday’s inflation data show the Bank of Canada should hold firm at its next interest rate announcement on Sept. 6.
“I think the Bank of Canada should pause,” he said. “If the Bank of Canada realizes that some of the biggest components to inflation is what they’re doing to interest rates then they should no longer be raising rates.”
Douglas Porter, chief economist with BMO Capital Markets, estimates about a 30 per cent chance the Bank of Canada raising rates next month.
“I probably came in today thinking there was very little chance the Bank of Canada was going to raise interest rates in September, and the main thing I would point to is we’ve seen three months in a row where the unemployment rate has risen,” he said in a television interview.
Porter said the full second quarter GDP numbers, which come out on Sept. 1, might be “the deciding point” for the Bank of Canada’s next rate decision.
“At this stage, I would still lean with the view that the bank’s probably going to move to the sidelines,” he said.
Tiago Figueiredo, an economist with Desjardins, believes Tuesday’s inflation figures should prompt the Bank of Canada to pause rates hikes for now, in part because the bank’s timeline for reaching its inflation target is still far in the future.
“Today’s report might nudge the balance of risks slightly to the upside as far as the odds of a September rate hike are concerned,” Figueiredo wrote in a note.
“However, weaker signs in GDP and jobs data recently will also factor into the analysis. Barring any major surprise in the upcoming activity data, we expect the Bank of Canada to stay sidelined on Sept. 6.”
Jay Zhao-Murray, an FX analyst at Monex Canada, said the July inflation data “will be a source of headaches all around the governing council” but likely mean a pause in rate hikes, at least for September.
“The report probably wasn’t hot enough to cause an immediate restart of policy tightening, but it definitely wasn’t cool enough to confirm that price growth is back under control,” he said in a written statement.
Still, Zhao-Murray said the data could have policymakers considering further measures if inflation remains sticky.
With files from The Canadian Press