The growing threat of inflation looms over the Bank of Canada as it prepares its second-to-last interest rate announcement of 2021, with Statistics Canada reporting this week that the national inflation rate is now at its highest in 18 years.
Sitting at 4.4% in September, that rate exceeded the Bank’s target range for the sixth month in a row, leading to speculation that the Bank could be jolted into movement on rates sooner than anticipated.
Canadian Imperial Bank of Commerce (CIBC) World Markets deputy chief economist Benjamin Tal believes that those year-over-year numbers are something of a “mirage,” and the consequence of comparing elevated current prices with very low prices around the same time last year.
Still, he told Canadian Mortgage Professional that the Bank was likely to factor inflation concerns into its next statement (scheduled for October 27), with a more hawkish approach potentially in the offing.
“I think they will give a hint that the first move [on interest rates] will be in the second half of 2022 – but early in the second half of 2022,” he said. “I think they clearly will suggest that, although they still believe that [inflation] is temporary, and I think that they’re right.
“Temporary does not mean that it will end tomorrow. It can last for a few more months, well into next year, and I think that’s something that caught them a bit by surprise.” Tal said the consistency of those price increases would be of particular concern for the Bank and a prominent factor in influencing its decision on whether to move swiftly on interest rates.
“Their nightmare is a situation in which prices will start rising on a consistent basis,” he said. “That will change the psyche of consumers and the market and raise inflation expectations because the minute you have expectations rising, it’s very difficult to take them down.”
Read full article HERE