Canada’s inflation beat boosts chances of 75 bps rate hike

11:13 am Wednesday, October 19th, 2022

By Julie Gordon

OTTAWA (Reuters) – Canada’s annual inflation rate edged down but exceeded forecasts in September while underlying price pressures were largely unchanged, data showed on Wednesday, amplifying calls for another hefty rate hike by the central bank next week.

Inflation was 6.9%, ahead of forecasts of 6.8% and down from 7.0% in August. Excluding food and energy, prices rose 5.4% from 5.3% in August.

All three of the Bank of Canada’s core measures of inflation, its preferred yardsticks for underlying inflation, were flat in September, with the average of the three matching August’s upwardly revised 5.3%.

“Even though the headline numbers have moved lower – it does look like the inflationary shock is spreading a bit,” said Andrew Kelvin, chief Canada strategist at TD Securities.

“I think it’s going to really intensify the conversation around whether (the Bank of Canada) needs to lift rates by 50 or 75 basis points,” he added.

Graphic: Canadian inflation and interest rates – https://graphics.reuters.com/CANADA-ECONOMY/INFLATION/zjpqkxxxnpx/chart.png

The central bank’s next decision is Oct. 26, when it will also publish quarterly forecasts. Money markets bets swung to a 75-basis point move after the inflation data, with the policy rate now seen peaking between 4.25% and 4.50% early next year.

Most economists polled beforehand by Reuters said they expected a 50 bps rise.

The bank has hiked rates by 300 bps since March and made clear more increases are coming.

There are signs those fast-rising rates are cooling Canada’s once red-hot housing market. Homeowner replacement costs, tied to the price of new homes, slowed to 7.7% in September, the fourth consecutive deceleration.

But it was lower gasoline prices that edged the annual inflation rate down, while consumers paid 11.4% more for their groceries, the largest gain since August 1981.

“We’ve seen some of the impact of hiking and also the weaker energy prices. The hope would have been that we’d see some more weakening and it’s not happening,” said Jimmy Jean, chief economist at Desjardins Group.

Jean also pointed to a Bank of Canada survey this week showing near-term consumer inflation expectations at record highs, which “puts the Bank of Canada in a position to have to still be aggressive.”

The Canadian dollar was trading 0.3% lower at 1.3775 against the U.S. dollar, which rose against a basket of major currencies.

(Reporting by Julie Gordon in Ottawa; Additional reporting by Dale Smith and Steve Scherer in Ottawa and Fergal Smith in Toronto; Editing by Mark Porter, Angus MacSwan, John Stonestreet)