Eyes on Bank of Canada as inflation wanes

Many expect lender to stand pat on rock-bottom interest rate

OTTAWA – Could it be time for the Bank of Canada to re-write its script?

Inflation has been waning — despite upward pressure from energy prices and higher food costs — while the economy is cooling, as is the housing market.

The central bank, however, has stubbornly stuck to its rate-hike-sometime-but-notquite-yet policy, with very few edits of its statements along the way. Two years on, its key lending rate remains near rock bottom.

Still, policy-makers insist this will not last, and that borrowing costs eventually must go up. Others, on the other hand, see little reason to move on rates until the global economic storm clears — and that could be a long way off.

Inflation is the key focus of the Bank of Canada, which uses its lending rate to steer consumer price rises toward two per cent, the midway point of its one- to three-percent comfort zone.

But in August, overall consumer prices rose at an annual rate of just 1.2 per cent, down from a year-over-year advance of 1.3 per cent the previous month, Statistics Canada reported Friday.

The report also showed that core inflation, stripping out volatile items, such as some energy and food products, slowed to 1.6 per cent on annual basis from its 1.7-per-cent pace in July.

On the same day, the federal agency reported wholesale sales — an key indicator of the health of the economy — fell 0.6 per cent to $49.5 billion in July, after a 0.3-per-cent drop in June. Other data this week showed house prices in Canada rising at a slower pace and sales beginning to decline, due mostly to the federal government’s recent tightening of mortgage rules.

“With core inflation tracking well below the Bank of Canada’s Q3 forecast, the housing market softening and the Fed stepping harder on the monetary accelerator, rate hikes in Canada remain at least a year away,” BMO Capital Markets economist Robert Kavcic said.

Financial markets have also factored in a stand-pat rate scenario until late 2013 or early 2014, according to Craig Alexander, chief economist at TD Economics.

Even so, he said Friday’s report is “consistent with the Bank of Canada’s forecast for inflation.

“They continue to believe inflation will gradually rise over the coming year and the core metric will be close to two per cent in roughly a year’s time.”

The data “won’t change the thinking at the Bank of Canada at all, even though the rate of inflation is below target.”

Capital Economics, however, expects core inflation to continue declining in the coming months “as external and domestic risks dampen GDP growth.

“With unemployment likely to rise as a result, we expect the Bank of Canada soon to drop all pretences about removing policy stimulus.”

Bank governor Mark Carney will have an invitationonly chat with CEOs and other corporate players on Monday in Ottawa, but he has no public appearances scheduled in the coming month.

So the next time we hear from Carney and other bank policymakers will be Oct. 23, when they announce their latest interest-rate decision.