Could BoC hike rate again despite Canada’s easing Inflation?

The Data released on Tuesday showed lower-than-expected inflation figures in Canada. This data was largely as expected, so, the Bank of Canada is expected to raise rates by 25 bps next week before pausing for the remainder of 2023.

The BoC’s core measures CPI-median and CPI-trim also decelerated by one tick to 5.0% and 5.3% respectively, after being revised up in the prior month. While core inflation remains too high, when excluding the increase in mortgage interest costs, which reflect the rapidly rising interest rates, things look better with a monthly gain of about 0.2%.

Tuesday’s data is largely as anticipated and therefore, economists continue to expect the Bank of Canada to raise rates by 25 bps next week before pausing for the rest of the year.

The good news is that inflation is easing, and that will become more noticeable when the big monthly increases seen this past spring start to drop out of the annual calculation this year. Moreover, core inflation excluding mortgage costs is growing at a pace much closer to target. However, given the strong December job’s report and tightness in the labour market, that likely won’t be enough to deter the Bank of Canada from raising rates 25 bps one last time next week.

The Bank of Canada is heading into its January 25 interest-rate decision with a different slogan: “data dependence.” Over the past eleven months, the central bank has pushed its policy rate up to 4.25 per cent from 0.25 per cent with single-minded determination. The question was not whether it would increase borrowing costs at each meeting, but by how much.

Now, with interest rates firmly in restrictive territory and inflation trending down, Bank of Canada officials have turned off autopilot and are poring over economic data for signs of whether it’s time to hit pause on monetary-policy tightening.

If observers are surprised on the upside, they are still prepared to be forceful. But market participants recognize that interest rates have been raised rapidly and that their effects are working their way through the economy.

Data published since the December rate decision does suggest that the Canadian economy has more momentum than the bank would like to see. That increases the odds of another rate hike, and financial markets are pricing in a quarter-point move on January 25.