A commodities rally sparked by Russia’s invasion of Ukraine will push Canadian inflation higher for longer, with the headline rate now seen peaking at or above 6%, forcing the central bank to raise interest rates more aggressively, economists told Reuters.
Canada’s inflation rate has already surged well above the 5.1% that the Bank of Canada forecast for the first quarter in January, highlighting the tough road ahead to get price growth back down to the 2% target.
The central bank will have to balance efforts to tamp down on soaring prices against the risks that spiraling levels of mortgage debt could make Canada’s economy more sensitive to interest rate hikes than before the coronavirus pandemic.
Some investors worry that the BoC could cut short the economic expansion if it tightens too fast.
A Reuters survey of economists at five leading financial institutions and a consultancy showed that most now expect the Bank of Canada to hike borrowing costs four to five times in 2022, lifting its policy rate to 1.25% or 1.5% by the end of the year. Scotiabank is forecasting a year-end policy rate of 2.5%.
Canada’s latest inflation data on Wednesday surprised on the upside, with the Consumer Price Index hitting a new 30-year high of 5.7% in February. The jump was driven by broad gains across all sectors.
All six economists surveyed now see inflation peaking at or above 6% in the coming months, with their year-end forecasts ranging from 3.3% to 5.8%. The BoC in January forecast fourth-quarter inflation of 3.0%.
“The commodity price increases that we have seen in the past couple of weeks – that’s something that a central bank would normally want to look through,” said Josh Nye, a senior economist at RBC Capital Markets who was among those surveyed.
“But with inflation already so far above the Bank of Canada’s target, they’ve said they’re more concerned about upside surprises than they are about downside surprises on inflation.”
CATCHING UP
The central bank raised its policy rate to 0.50% from 0.25% this month, its first increase in three years. Bank of Canada Governor Tiff Macklem said more rate hikes were coming and he left the door open to a rare half-percentage-point increase.
Money markets see a roughly 50% chance of the larger rate increase when the central bank issues its next policy decision on April 13. It has been almost 22 years since Canada saw a 50-basis-point rate hike.
The conflict in Ukraine and ensuing sanctions on Russia have played havoc with global supply chains, sending prices of many key commodities higher. Russia is one of the world’s biggest energy producers, and both it and Ukraine are among the top exporters of grain.
Nye estimated the surge in oil prices since late February on its own will add about three-quarters of a percentage point to Canada’s CPI.
U.S. inflation is expected to average 7.7% this quarter, according to a Reuters poll of 69 economists last week, up from the 7.1% forecast in February.
With Canada’s economy firing on all cylinders, its central bank must now act forcefully on interest rates to tame price surges, said Derek Holt, head of capital markets economics at Scotiabank.
“Given how far behind the inflation curve the Bank of Canada finds itself, they need to do something more convincing in order to demonstrate that they are serious about their inflation mandate,” said Holt, who also participated in the survey.
Still, the central bank will need to take into account the potential that war will slow global economic activity, while also balancing the inflationary pressures coming from supply shortages due to the latest COVID-19 restrictions in major Chinese manufacturing hubs.
“There is the probability of renewed supply chain issues in other goods that will also keep inflation more elevated than we previously anticipated,” said Andrew Grantham, a senior economist at CIBC Capital Markets who was among those surveyed.
Graphic: Forecasts for Canadian interest rates: https://graphics.reuters.com/CANADA-ECONOMY/INFLATION2/mypmnxdnnvr/chart.png
(Reporting by Julie Gordon in Ottawa; Editing by Denny Thomas and Paul Simao)
OTTAWA – The parliamentary budget officer says the federal government likely failed to keep its deficit below its promised $40 billion cap in the last fiscal year.
However the PBO also projects in its latest economic and fiscal outlook today that weak economic growth this year will begin to rebound in 2025.
The budget watchdog estimates in its report that the federal government posted a $46.8 billion deficit for the 2023-24 fiscal year.
Finance Minister Chrystia Freeland pledged a year ago to keep the deficit capped at $40 billion and in her spring budget said the deficit for 2023-24 stayed in line with that promise.
The final tally of the last year’s deficit will be confirmed when the government publishes its annual public accounts report this fall.
The PBO says economic growth will remain tepid this year but will rebound in 2025 as the Bank of Canada’s interest rate cuts stimulate spending and business investment.
This report by The Canadian Press was first published Oct. 17, 2024.
OTTAWA – Statistics Canada says the level of food insecurity increased in 2022 as inflation hit peak levels.
In a report using data from the Canadian community health survey, the agency says 15.6 per cent of households experienced some level of food insecurity in 2022 after being relatively stable from 2017 to 2021.
The reading was up from 9.6 per cent in 2017 and 11.6 per cent in 2018.
Statistics Canada says the prevalence of household food insecurity was slightly lower and stable during the pandemic years as it fell to 8.5 per cent in the fall of 2020 and 9.1 per cent in 2021.
In addition to an increase in the prevalence of food insecurity in 2022, the agency says there was an increase in the severity as more households reported moderate or severe food insecurity.
It also noted an increase in the number of Canadians living in moderately or severely food insecure households was also seen in the Canadian income survey data collected in the first half of 2023.
This report by The Canadian Press was first published Oct 16, 2024.
OTTAWA – Statistics Canada says manufacturing sales in August fell to their lowest level since January 2022 as sales in the primary metal and petroleum and coal product subsectors fell.
The agency says manufacturing sales fell 1.3 per cent to $69.4 billion in August, after rising 1.1 per cent in July.
The drop came as sales in the primary metal subsector dropped 6.4 per cent to $5.3 billion in August, on lower prices and lower volumes.
Sales in the petroleum and coal product subsector fell 3.7 per cent to $7.8 billion in August on lower prices.
Meanwhile, sales of aerospace products and parts rose 7.3 per cent to $2.7 billion in August and wood product sales increased 3.8 per cent to $3.1 billion.
Overall manufacturing sales in constant dollars fell 0.8 per cent in August.
This report by The Canadian Press was first published Oct. 16, 2024.
