Canada's inflation rate has risen again
Economists predict the Bank of Canada may raise its key rate again because of this
On Tuesday, it was reported that Canada's inflation rate climbed to 3.3% in July. This is more than expected. At the same time, the main indicators, to which the Bank of Canada pays attention, remain at the same level. This data increases the likelihood of another interest rate hike, as many economists believe.
Analysts contacted by Reuters news agency had forecast inflation to rise to 3% after a fall to 2.8% recorded in June. Statistics Canada (StatCan) revealed that the consumer price index (CPI) rose 0.6%, double the 0.3% rise that had been forecast.
The Bank of Canada's 2 main measures of core inflation, the Consumer Price Index and the trimmed Consumer Price Index, averaged 3.65%, down slightly from 3.70% in June.
StatCan believes that last month's rise in core inflation was driven mainly by the base-year effect in gasoline prices, as the July 2022 decline in fuel prices was no longer affecting the 12-month movement.
"I think we're getting another round of spiraling upside risks to inflation in Canada. Hikes aren't done in my opinion," Derek Holt, vice president of capital markets economics at Scotiabank, shared with Reuters.
Money markets raised bets that the Bank of Canada will raise its key rate by 25 points in September. Immediately following the news of rising inflation, the probability of a key rate hike rose to 35% — a 13% increase from the previous reading. The probability of the Central Bank of Canada raising the interest rate then declined slightly, and is now holding at 31%.
The Bank of Canada raised the overnight interest rate to 5% in July, a 22-year high. This is the tenth increase since last March.
However, not all economists believe that higher inflation will incline the Bank of Canada to raise its key rate when it makes its rate decision in September.
"Given the Bank of Canada has given itself a long time to reach the 2% inflation target, this likely won't be enough to bring central bankers off of the sidelines," suggests Desjardins Group economist Tiago Figueiredo.
"We see it as close to a 50-50 proposition whether they hike or not, although we tend to lean towards a hold given the softening job market," said Jules Boudreau, senior economist at Mackenzie Investment.
Canada's labor market shrank by 6,400 jobs in July and the unemployment rate reached 5.5%, according to StatCan data.
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Food prices rose by 8.5% in July, the slowest pace in more than a year. The price increase was mainly influenced by the cost of fresh fruits and, to a lesser extent, bakery products. Prices for services rose by 4.3% and prices for goods by 2.3%.
The Bank of Canada, having raised rates in July, said that when making future rate decisions, it will scrutinize all data before moving into action. Before a potential rate hike, which could take place on September 6, the Central Bank still has to study GDP data for the second quarter of the year, which will be released on September 1.
