The Canadian dollar is softer today after a CPI surprise. The monthly inflation report showed prices up 2.9% y/y compared to 3.3% expected. It's a welcome relief for Canadians but will it change the path for the Bank of Canada? Markets are currently pricing in a 24% chance of a March cut compared to 19% before the data.
Further out, economists weigh in on what it means.
CIBC:
Weak consumption is finally starting to impact pricing in areas of more discretionary spending. They highlight that the BOC's Q1 forecast is for 3.2% but Q1 is tracking at a 2.9% pace. Food price inflation eased, with the 0.1% seasonally adjusted increase on the month the weakest since March 2021. They also note an unusual fall in clothing prices, which typically rise in January. On the problematic side, they note that rents increased by a further 0.7% (unadjusted) on the month and were up by 7.9% on a year-over-year basis.
They continue to expect a first rate cut in June.
Laurentian Bank:
"Given the economic underperformance of the Canadian economy relative to the United States, it makes sense to see CPI inflation running slower than south of the border despite our productivity woes and the unfortunate presence of a chronic housing supply shortage," Laurentian writes.
They also highlight that this CPI report is backed up by the latest Canadian Federation of Independent Businesses survey, which shows intended prices increases at 2.8%. That's the first result below 3% since 2021
Looking ahead, they worry about rising transpiration costs in the next few months but with the economy slowing, they also see a first cut in June.
Capital Economics
"January’s inflation print was a big positive shift in the right direction, but the Bank of Canada will need to see this trend continue before it will be comfortable pivoting to rate cuts ... After all, we saw headline inflation fall below three per cent in June, but this was followed by a series of sticker inflation prints.”
RBC
RBC highlights the still-wide breadth of price increases and worries that shelter inflation will remain sticky due to a housing shortage. With that and the jobs market remaining strong, they don't see the BOC in a rush.
As of now, our base case assumes the BoC starts to lower interest rates around mid-year.
National Bank
National Bank also highlighted problems with shelter inflation.
“This increase is due to mortgage interest costs, for which the central bank is responsible, and to the rise in rental prices attributable to the dizzying increase in population,” they write. “Over the coming months, we continue to believe that restrictive monetary policy will further weigh on the economy and the labour market in order to keep in check inflationary pressures outside shelter."
National Bank has a June cut as a “baseline scenario” but writes that today's report "has increased the probability of an April rate cut."
USD/CAD was last up 33 pips to 1.3522.
