The sharp drop in February’s headline inflation reading suggests rates have now peaked and that the next rate move will be a cut.

That’s the take from ING’s Chief International Economist James Knightley following a second straight month of Canada’s annual inflation rate surprising to the downside.

The consumer price index slowed to an annual rate of 5.2% in February, Statistics Canada reported on Monday, marking the largest deceleration since February 2020. That’s down from a reading of 5.9% in January and slower than the 5.4% rate expected by a Bloomberg survey of economists.

Most economists believe the drop in inflation all but guarantees another rate pause by the Bank of Canada at its April 12 meeting.

Some, like Knightley, are going further and calling for at least one 25-basis-point rate cut before the end of the year, particularly against the backdrop of the current global banking challenges. That would knock the Bank’s overnight target rate back down to 4.25% from its current rate of 4.50%.

“We still think the next move in the BoC policy rate will be downwards and that the first cut is likely to come before the end of the year,” Knightly wrote. “Canada’s greater exposure to interest rates rate hikes via a high prevalence of variable rate borrowing means consumer activity should slow through 2023.”

Additionally, higher household debt levels in Canada—more than 180% of disposable income versus 103% in the U.S.—means Canada is “especially exposed to the risk of a housing market correction in a rising interest rate environment.”

“Falling inflation rates will give the BoC the room to respond with looser monetary policy, especially with the Finance Minister Chrystia Freeland suggesting her upcoming budget will ‘exercise fiscal restraint’ to help in the battle against inflation,” Knightly added.

BMO’s Douglas Porter added that, with inflation subsiding at its current pace, “there’s really no underlying reason for the Bank to hike further.”

“Overall, the Bank’s pause looks prudent, and we expect them to stay at current levels for quite some time, barring a major flare-up in the banking turmoil,” he wrote.

The rise in shelter costs is slowing

Digging into the details of StatCan’s February inflation report, shelter costs rose at a slower pace year-over-year for the third consecutive month.

Slower growth was recorded in homeowners’ replacement cost, which is related to the price of new homes, which rose at an annual pace of +3.3% compared to +4.3% in January. Other owned accommodation expenses, which includes real estate commissions, also eased to +0.2% in February, down from a rate of +1.1% in January.

However, one shelter component remains one of the biggest drivers of overall inflation: mortgage interest cost, which climbed by 23.9%, up from +21.2% in January. This was the largest increase in 40 years, Statistics Canada noted. “Many will thus point to the BoC as the ’cause’ of inflation,” wrote BMO’s Porter, “although note that inflation is still 4.7% even excluding mortgage interest costs.”

That contributed to a moderate 0.3% month-over-month gain in CPI excluding food and energy.

The Bank of Canada’s preferred measures of core inflation also continued to ease, with CPI trim falling to +4.8% (from +5% in January), CPI median down to +4.9% (from +5%) and CPI common decelerating to +6.4% (from +6.6%).

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Premier Danielle Smith says renewable energy is unreliable and that Alberta should build additional gas-fired power plants for a more predictable source of electricity.

“This is a natural gas basin,” Smith told delegates at the Rural Municipalities of Alberta (RMA) convention in Edmonton on Wednesday. “We are a natural gas province. And we will continue to build natural gas power plants, because that is what makes sense in Alberta.”

In response to questions from rural councillors, Smith also said she’s looking at ways to ensure solar and wind companies set aside money to reclaim land in the future for when a renewable installation is dismantled.

“I think that it needs to be addressed at the start, or we’re going to have the same problem that we had with the orphan wells, and why would we want to bring that to the province of Alberta?” said Red Deer County Mayor Jim Wood.

Smith said she met with power providers and learned the province’s electricity grid twice came close to needing more power than it could supply in the last few months.

She pointed to stagnant air and solar panels covered with snow and ice leading to a dearth of wind and solar generation at those times.

The emissions from natural gas plants can be captured and sequestered to meet climate targets, she said.

Smith’s promotion of more natural gas-fired power plants comes days after the United Nations’ Intergovernmental Panel on Climate Change said wealthy countries should phase out gas plants by 2035 to prevent irreversible damage to the planet.

The premier said it concerns her to see solar panels and wind farms installed on arable land.

Kara Westerlund, vice-president of RMA, says rural councils share that concern. She told reporters the installations should be going onto brownfields rather than “taking some of the best growing soils and agricultural land out of production.”

She sees renewable energy sources as complementary to oil and gas.

“We’ve never felt that one is going to replace the other,” Westerlund said.

Renewables a cheap source of energy, researcher says

RMA members previously voted for a resolution calling on the province to require renewable companies to pay for a bond that would cover the costs of removing solar panels or wind turbines past their useful lives.

The province already has a regulation from 2018 that stipulates how the sites are to be decommissioned.

Smith said she’s considering requiring renewable companies to set aside a proportion of revenue to save for site cleanup costs — and that the remediation money should transfer to any new site owners.

However, devising a solution for unreclaimed oil and gas sites is Smith’s priority.

“Once people feel comfortable that we’ve got the right model there, then the next obvious question is, what are we going to do about solar and wind?” she said.

According to the Alberta Energy Regulator, there are nearly 200,000 inactive or abandoned wells in the province.

Binnu Jeyakumar, director of electricity at the Pembina Institute, said inactive oil wells and renewable sites aren’t the same.

“We get orphan wells because we run out of viable gas production in these locations,” she said. “You don’t run out of wind or solar in a location.”

When equipment breaks down, it may be viable for an owner to install new turbines or panels, she said.

Jeyakumar also challenged the premier’s assertion that solar and wind are unreliable sources of electricity. She said hours of sunlight and weather are predictable: an electrical system operator can plan for those fluctuations by using diverse sources of energy, and by building more storage, transmission and distribution systems.

Most solar panel systems are built so snow and ice slide off or melt, she said.

She said building a new gas plant is a risky commitment in a world where energy prices fluctuate wildly and the power plant is likely to be around for another 30-to-40 years. She said there are sound reasons why investors are turning to renewables.

“I’m not saying we should only build solar,” she said. “But we should be basing our grid on solar and wind, because they are the cheapest options.”

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Alberta’s premier assured a ballroom of rural leaders Wednesday that she does not want to see the province move away from electricity generated from fossil fuels, while complaining about solar panels covering farm land.

“This is a natural gas basin. We are a natural gas province and we will continue to build natural gas power plants because that is what makes sense in Alberta,” Danielle Smith said.

“Yes, hydro makes perfect sense in Quebec and B.C. and Manitoba. And Ontario has nuclear and hydro as well. But we have to keep fueling our economy with natural gas power plants.”

Smith made the comments at the spring convention of the Rural Municipalities of Alberta (RMA) that was held in downtown Edmonton. The RMA is made up of 69 counties and municipal districts.

She added that carbon capture and usage will help Alberta meet emissions goals, but didn’t mention climate change.

The premier’s comments on power came after she was asked about a lack of municipal control in project approval and solar panels covering “prime land” without cleanup bonds in place to make sure companies pay for reclamation.

“I’m supportive of solar and wind projects where they make sense. But I can tell you from conversations with people in my own community that putting solar panels on prime agricultural land does not make sense,” Smith responded.

“Especially like the one I drive past in Brooks every day I go down there. It’s covered in ice and snow and not generating any power at all.”

Jim Wood, mayor of Red Deer County, also asked Smith what Alberta is doing to make sure renewable energy companies clean up projects that one day become defunct.

“The concern is this: Some of these solar may be only viable due to carbon-credit grants and so forth that may not be here forever. The companies may not have enough finances to in fact do the cleanup,” Wood said.

“And if they’re not viable enough to put a bond up to cover their cleanup, then they’re not viable. And I think it needs to be addressed at the start or we’re going to have the same problem as the orphan wells. And why would we want to bring that to the province of Alberta?”

Smith said legislation requiring cleanup bonds is an “open question” for her government and one she plans to consult rural leaders on in the future.

The premier has faced widespread criticism lately over a plan to give royalty breaks to oil companies for cleaning up inactive wells, which they’re already legally required to.

The province’s energy minister last week called the Opposition “anti-oil and gas activists” after an NDP MLA demanded companies pay for the cleanup themselves.

The NDP claims the government’s proposed $100 million Liability Management Incentive Program is only the start of a $20 billion giveaway to oil and gas companies.

MLA Marlin Schmidt called the initiative “a scam” in the legislature, drawing a warning from Speaker Nathan Cooper for use of the word.

On Wednesday, Smith acknowledged Alberta first needs to figure out how to get orphan wells reclaimed before requiring renewables companies to do the same, but like wells, believes it will become an issue in the future.

“In the case of wind-turbine farms, as I understand it, when installing them typically is 1,500 truckloads to install them, that means someone has to pay 1,500 truckloads to take them away,” she said.

NDP Leader Rachel Notley agreed that there needs to be plans in place to clean up all energy projects, but said the government is going about it in the wrong way.

“Danielle Smith is campaigning on giving billions of taxpayers’ dollars to financially solvent companies that are choosing not to clean up after themselves. She can’t be trusted on this issue,” she said in a statement to CTV News Edmonton.

Political scientist Duane Bratt said he wasn’t surprised by Smith’s comments because being loud cheerleaders of the oil and gas industry is a clear strategy of the UCP government.

“When they talk about renewables, they talk about it not working when the wind isn’t blowing and the sun isn’t shining and so pivoting to waste issues on renewables, that’s totally on brand,” he said.

Last year, Alberta had an installed capacity, the maximum electrical output under specific conditions, of 67 per cent from natural gas and coal and 31 per cent from solar, wind and hydro, according to Alberta Electric System Operator (AESO).

In 2019, about 89 per cent of Alberta’s electricity came from fossil fuels and 10 per cent from renewables, according to the Canada Energy Regulator.

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