Will BoC Delay Monetary Policy Normalization

Data released on Wednesday showed the Canadian CPI rose in December to 4.8% (annual), the highest level since 1991. Core inflation will likely continue to run around 2.3% and 3%. They see the Bank of Canada raising rates five times during 2022 according to analysts at the National Bank of Canada

Key Quotes:
“The Canadian CPI print for December was in line with consensus expectations. As a result, annual inflation rose one tick to 4.8%, its highest level in just over 30 years. The food component remained vigorous this month and year on year growth reached 5.2%, its strongest gain since 2009. Excluding food and energy, month over month price increases were slightly stronger than the headline (+0.37%).”

“On a month-over-month basis, our in-house replication shows an acceleration for CPI-Trim (+0.30%) and CPI-Median (+0.24%), as seen for CPI ex-food & energy. On a three-month annualized basis, those two measures are running respectively at 3.0% and 2.3%. This is essentially the pace we are expecting for core inflation over the next few months given current supply chain disruptions and labor shortages.”

“The BoC Business Outlook Survey released earlier this week suggests the persistence of high inflation. Indeed, nearly all firms polled expected inflation above the 2% mark for the next two years with two-thirds expecting above 3% inflation over that same period. What does this mean for the Central Bank and the upcoming normalization of monetary policy? Given this backdrop, the central bank appears to be late in its normalization of monetary policy. We expect five rate hikes this year with the kick-off occurring in March.”