Car rates

Inflation in Canada could peak, but that’s no relief for the central bank

People shop at a Walmart supermarket in Toronto, Ontario, Canada March 13, 2020. REUTERS/Carlos Osorio/File Photo

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OTTAWA, April 21 (Reuters) – Headline inflation in Canada may have peaked after hitting a 31-year high in March, economists said, although the central bank still faces an uphill battle to bring back soaring price on earth.

Even if March’s 6.7% is the peak and price growth slows next month, inflation will remain at levels last seen 30 years ago and economists say the Bank of Canada will have to acting aggressively to get closer to its 2% target.

To be sure, there’s also a chance inflation could rise even further, especially as StatsCan adds used car prices — a key driver of U.S. inflation — to its index and updates the weighting. of its baskets in the months to come.

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The stronger-than-expected March release prompts economists to call for a second 50 basis point (bp) hike in June to take rates to 1.5%, with money markets betting on a total of 250 bps of hikes this year .

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Some economists are already predicting a third hike of 50 basis points in July, with Scotiabank advocating a move of 75 to 100 basis points in June or July. The central bank typically moves only 25 basis points at a time.

“The peak is just a milestone, then you have to bring inflation down and it’s going to take some time to reach an acceptable range,” said Jimmy Jean, Desjardins Group’s chief economist. “We don’t expect that until early 2023.”

The Bank of Canada, in a rate decision last week, said it expects inflation to average nearly 6% in the first half of this year, declining to 2.5% later in 2023 and then decreasing to 2% in 2024.

After doubling its benchmark rate to 1% in the decision, Bank of Canada Governor Tiff Macklem said the bank would continue to act “forcefully” if necessary. Read more

Countries around the world are grappling with runaway inflation amid rising demand and tight supply chains. Russia’s invasion of Ukraine added to the pressure, leading to a sharp rise in commodity prices.

Any easing of these factors should be gradual, the economists said. At the same time, Canada’s Liberal government continues to inject stimulus into the economy, albeit at a slower pace, which is helping to boost domestic inflation. Read more

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That leaves the Bank of Canada holding the bag. Later this month he will begin to reduce his holdings of government bonds, allowing them to roll over as they mature, but interest rates remain his main tool in the fight against inflation.

Canada’s bubbly housing market, with prices up more than 50% in two years, and high levels of household debt will weigh on the central bank’s path, economists said.

But some relief is coming. Inflation has now been above 3% for 12 months and, as the following months begin to rise above the high levels of the previous year, the base effect should help temper the outsized gains barring major global shocks. , the economists said.

Gasoline price increases have slowed so far in April compared to March, and the housing market is showing signs of cooling.

And the upward pressure on used-car prices won’t show up in the April data, Statscan said. It will provide details on how and when this change will take effect on May 18.

“It would take a brave person to call this the peak, but provided energy prices don’t rise further, this could indeed be the peak of headline inflation,” said Doug Porter, chief economist. at BMO Economics, in a note.

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Reporting by Julie Gordon in Ottawa, additional reporting by Steve Scherer in Ottawa and Fergal Smith in Toronto Editing by Denny Thomas, Diane Craft and Chris Reese

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