TORONTO (Reuters) – Excluding food and energy costs, Canadian inflation is expected to remain above 3% through the fourth quarter of this year. Moved to Canadian rate cuts.
Canadian inflation has eased in recent months, but much of the easing has come from lower energy prices, a volatile factor the BoC tends to exclude when making policy decisions.
Core or underlying measures of inflation, such as the widely tracked consumer price index, which excludes food and energy, are expected to outperform key rates after price pressures spread from commodities to slower-moving items such as wages and services. also shows great persistence.
“We think the BOC will only start cutting rates if it believes the underlying inflation trend is below 3%,” said Doug Porter, chief economist at BMO Capital Markets.
A prolonged period of high interest rates could increase the proportion of Canadians with high debt levels and force them to reset their mortgages at levels that strain household budgets. The Canadian added a record amount of mortgage debt during the COVID pandemic, but the mortgage cycle is relatively short, typically five years for him versus 30 for her in the US.
The BoC has made greater progress in slowing inflation than some of its major peers, including the Federal Reserve and the European Central Bank.
We expect headline inflation to reach 3%, the high end of our 1-3% target range, down from 4.3% in March by the middle of the year. The BoC’s final inflation target is set at 2%.
Still, rising inflation expectations could be another reason for the Bank of Canada to be cautious about cutting rates.
“Even if inflation expectations return to 2%, they may not be as stable as they were before,” said Stephen Brown, senior Canada economist at Capital Economics.
The BoC has downplayed market pricing for a 2023 rate cut and said it stands ready to tighten further if needed to restore price stability.
Investors appear to be paying attention, betting on a period of stable interest rates that could follow in the fourth quarter of this year, rather than the move to June rate cuts that had been expected a few weeks ago. .
The minutes of the BoC’s April policy meeting are due to be released on Wednesday. The central bank kept its rate unchanged for the second time in a row after raising the benchmark rate to his 4.50%, his highest in 15 years.
These rate hikes contributed to inflation by pushing up the cost of borrowing mortgages, but their main purpose was to slow the economy.
“For banks to be confident that inflation will not start rising again if they cut interest rates,” Brown said, “it would require GDP growth to decline by at least a quarter, if not at least more sharply. We need to slow down to . He said.
Reported by Fergal Smith.Editing by Paul Simao
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