Despite pressure for cuts, rates likely to rise.
OTTAWA • Reports of a severe drought in the U.S. Midwest inevitably lead to speculation of higher food costs.
And when warnings of higher oil prices are added to the mix, the talk turns to interest rate hikes. So far, neither has affected Canada’s mild inflation climate.
In fact, Friday’s report from Statistics Canada showed consumer prices in June were below forecasts, adding some volume to recent calls for Canada to begin cutting rates — as many countries have done in response to a teetering global economy.
But chances of the Bank of Canada following suit are next to nil, economists say. Barring a major deterioration in Europe, the United States or elsewhere, count on borrowing costs to eventually go up.
The inflation report shows the annual rate of increases was running at 1.5% overall in June, led by higher prices for vehicles and electricity. That’s up from a year-over-year pace of 1.2% in May, but below forecasts for a 1.7% increase.
Core inflation — stripping out volatile items, such as some food and energy products — rose to 2% from 1.8% the previous month. Analysts had expected core prices to rise by 2.3% in June.
Both overall and core read- ings were within the Bank of Canada’s 2% inflation target, and that means it won’t be in any hurry to move the benchmark lending rate from 1%, where it has been for almost two years.
Emanuella Enenajor, an economist at CIBC World Markets, noted the central bank’s inflation outlook — contained in its monetary policy report released Wednesday — is for 1.2% overall in the third-quarter and a core rate of 1.9%.
“That’s actually quite weak,” she said. “So these [June] numbers are not surprising the bank. They’re actually a bit stronger than the bank [had expected], and they might very well fall to what the bank expects, and [policymakers] still wouldn’t change the outlook and the forecast, which is that it will most likely be increasing interest rates rather than cutting them.”
Still, food and energy costs — closely tracked by the central bank — appear set to rise in the coming months, adding upward pressure to the inflation outlook.
That’s because the extreme heat in the U.S. is threatening to devastate crops, sending prices for corn and soybeans to record highs.
“Usually, it takes about six months or a little bit longer sometimes for changes in crop prices to fully work their way into grocery prices,” said Douglas Porter, deputy chief economists at BMO Capital Markets.
“So I would look for a maximum impact of the U.S. drought to be around the turn of the year,” he said, with food prices forecast to rise between 4% and 6%.
“The level of a lot of food prices, like corn, was already relatively high. So, while we’re seeing record highs, it won’t necessarily lead to a big burst in inflation. But we are slowly but surely grinding up our inflation call in 2013 — just a little bit more than 2% — based on what’s going on now in the U.S.”
A recent spike in oil prices — hitting eight-week highs this week, mainly blamed on Middle East tensions — will also feed into inflation.
Tame oil prices “have been one of the major reliefs for the economy in the last three months, and here we’ve had oil prices up for the last four weeks and starting to filter through into gas prices,” Mr. Porter said.
“So, it looks like the good news on the pump-price front is over.”
Ms. Enenajor, at CIBC, said the jump in oil prices, “if it’s anything, it’s optimism that … we’re going to have the kind of central bank easing that’s going to stoke these risky assets.”
“I don’t necessarily think that we’re on the precipice of a new-found inflation problem. I think growth globally is just far too slow to really to push up inflation measurably.”