Canada: CPI release to encourage BoC hiking pause - ING

According to James Knightley, Chief International Economist at ING, today’s Canadian CPI figure is likely to encourage the Bank of Canada to pause before their next rate hike.

Key Quotes

“Below target inflation figures in July and August (1.3% and 1.2% respectively) failed to reign in the Bank of Canada’s hawkish stance, hiking rates for the second consecutive time during their September meeting (up 25bp to 1%). Robust broad-based growth has been a main reason for this, with the 2Q17 figure coming in at a massive 4.5% following an impressive 3.7% in 1Q17. This has been led by strong consumer spending, stemming from solid employment and income growth, increasing business investment and solid exports.”

“A pick-up in gasoline prices should add 0.3ppt to headline CPI this month and a further 0.2ppt over the next couple. Nonetheless, inflation is yet to reflect Canada’s booming economy, the BoC expecting it to average 1.6% in 2017, creating a lot of scrutiny for the BoC’s current 2% target. Governor Poloz has said that the delay in meeting the target has been down to “temporary factors” such as food competition, automobile pricing and electricity rebates. We think that today’s figure will undershoot the target again.”

“The BoC has also stated it wants to assess the impact of higher interest rates on heavily indebted consumers while the stronger CAD could also dissuade them from further near-term action.”

“This combined with the expectation that growth is likely to moderate in 2H17 and the existence of geopolitical uncertainties, notably the situation with NAFTA and Trump, has led us to believe that the BoC will keep their policy rate on hold at 1% through to year end with two further rate hikes taking place in 2018.”