Canada’s annual rate of inflation drifted further from the Bank of Canada’s 2% target in August, but, with other economic indicators pointing to cooling demand, experts are at odds over whether additional interest rate hikes are on the way.
The Consumer Price Index (CPI) edged up 4.0% year over year in August, up from 3.3% in July and 2.8% in June. Meanwhile, the CPI median and CPI trim — the BoC’s preferred measures of core inflation — rose to 4.1% and 3.9%, respectively.
While the acceleration in headline CPI was expected, the degree to which it rose was not. As several experts have highlighted, August’s reading stands in contrast to other economic measures, such as the cooling housing market and the rising unemployment rate, which signal that momentum is easing.
Whether the data necessitates another interest rate hike has economists divided; some are steadfast that rates will rise once more, but others are firm in their belief that the BoC will continue to hold.
Randall Bartlett, Senior Director of Canadian Economics at Desjardins, has taken the latter stance.
Although he admitted that there are "reasons for concern" in August’s reading, including the acceleration of CPI median and trim, Bartlett noted that the rise in headline CPI was largely driven by higher gas prices and a base-year effect, both of which are expected to "subside somewhat" in September.
By October, when the next BoC announcement is scheduled, it will not only have another inflation reading, but more data on growth and employment, too.
"We think inflation should trend lower from here, supporting the Bank’s decision to stay on hold earlier this month,” Bartlett wrote in an economic note. "For now, our forecast remains consistent with the BoC leaving rates on hold until Q1 2024."
But Bartlett’s optimistic outlook is not exactly shared by Derek Holt, Vice President and Head of Capital Markets Economics at Scotiabank.
In an economic report of his own, Holt called the notion that the BoC is done raising rates "utter rubbish" and a "work of fiction."
Although he stopped short of fully committing to the prediction, as there is still more than a month to go before the bank meets again, August’s data "definitely ups the odds of a rate hike."
"Barring major developments by [October] I would forecast a hike," Holt wrote, adding, "We cannot dismiss the possibility of multiple further hikes."
Leslie Preston, Managing Director and Senior Economist at TD Bank, echoed Holt’s belief that the odds of another rate hike have risen, noting that accelerating core inflation will surely "ring some alarm bells at the Bank."
But, despite the sirens, she expects that additional signs of economic slowing, like falling new home construction levels, will keep the BoC sidelined.
"Slow progress on inflation over the next several months will keep the Bank of Canada’s hand hovering over the rate-hike button, but with soft economic growth and rising unemployment, it is unlikely they will need to press it" TD’s Quarterly Economic Forecast reads. "Any talk of rate cuts isn’t likely until the middle of next year."