Price pressures are finally easing, giving Macklem more room to cut if needed
The unexpected downward move in inflation could give the Bank of Canada room to further reduce its trend-setting overnight interest rate if the economy worsens.
The Consumer Price Index rose 2.3% on a year-over-year basis in January, following a 2.4% increase in December, Statistics Canada said this week. Gasoline was the largest contributor to the deceleration. Excluding gasoline, the price index rose 3% in January, the agency said.
“Overall, this is an encouraging result for the Bank of Canada, with inflation finally nearing the 2% target on a broader basis,” Doug Porter, BMO chief economist, wrote in a research note. “There's still some wood to chop on core inflation, but the shorter term metrics are moderating noticeably.”
Porter said the average reading of two of the central bank’s core inflation measures matched the lowest in five years.
Economists had expected overall inflation to hold steady at 2.4%, according to consensus estimates. The surprise dip is further proof that inflationary pressures are “benign” in Canada, said Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets.
“As we’ve been saying for some time, Canadian central bankers have been too concerned about upside risks to inflation. It’s clear now that Governing Council should be squarely focused on supporting the economy,” he said, referring to the group of policy makers led by Governor Tiff Macklem that sets the Bank of Canada’s key overnight rate.
Porter said that while policy makers have made it clear the bar to cut rates again is high, “if inflation continues to decelerate, the Bank could be in position to support the economy should growth truly struggle as it undergoes a structural shift.”
The Bank of Canada’s next decision is March 18 in Ottawa.
