Canada's slowing inflation rate bolsters bets on early rate cut

A volunteer sorts through donated canned goods at the Ottawa Food Bank warehouse in Ottawa, Ontario, Canada October 27, 2022. REUTERS/Julie Gordon

By Ismail Shakil and Promit Mukherjee

OTTAWA (Reuters) -Canada’s annual inflation rate slowed significantly more than expected to 2.9% in January and core price measures also eased, data showed on Tuesday, bringing forward bets for an early interest rate cut.

It was the first time in seven months that headline inflation has dipped below 3%. That prompted money markets to hike bets for a rate cut in April to 58% from 33% before the figures were published.

The Bank of Canada’s next policy announcement is March 6. Analysts polled by Reuters had forecast inflation to tick down to 3.3% from 3.4% in December.

“It will certainly raise the odds on an April rate cut,” said Karl Schamotta, chief market strategist at Corpay.

Month-over-month, the consumer price index was unchanged, compared with a forecast of a 0.4% rise.

Two of the Bank of Canada’s (BoC) three core measures of underlying inflation also edged down. CPI-median slowed to 3.3%, lowest since November 2021, while CPI-trim decreased to 3.4%, lowest since July 2021.

The easing of prices across several categories and in core measures – which the bank follows closely – is likely to give confidence to the Bank of Canada (BoC) that keeping borrowing rates at a 22-year high of 5% is helping in cooling price pressures.

It had said last month after its policy meeting that while the discussion now is for how long the rates have to be kept up, it did not completely rule out rate hikes either, citing persistence in underlying inflation.

“The key takeaway here is that Bank of Canada can seriously consider cutting rates,” Doug Porter, chief economist at BMO Capital Markets.

The BoC has projected headline inflation to remain around 3% in the first half of 2024, before cooling down to 2.5% by the end of the year and reach its target of 2% year after.

The BoC kept its key overnight rate at 5% in January and said that while underlying inflation was still a concern, the bank’s focus is shifting to when to cut borrowing costs rather than whether to hike again.

The central bank had said last month that while high interest rates have helped to bring down red-hot prices, which touched a peak of 8.1% in June 2022, categories such as shelter costs led by rent and mortgage costs, food and wages have maintained underlying pressures on the inflation print.

Shelter price inflation, which includes mortgage interest costs, rent and components related to house prices, accelerated to 6.2% in January from 6% in December. Rents continued to show upward momentum and accelerated 7.9% in January from 7.7% in December.

Food inflation cooled down to 3.9% last month from 5% in December.

Prices of store-bought food rose 3.4% – the slowest pace since August 2021 – also putting downward pressure on headline inflation.

Excluding volatile food and energy, prices rose 3.1% compared with a 3.4% rise in December.

The bank’s next rate announcement is on March 6, when the bank is expected to keep its key policy rate on hold at a 22-year high of 5%.

The Canadian dollar reversed an early morning trend and weakened 0.13% to 1.3509 against the U.S. dollar at 1340 GMT.

The largest contributor to headline deceleration in January was lower gasoline prices, which fell 4% on an annual basis, Statistics Canada said. Month-over-month, gasoline prices fell 0.9%, marking the fifth consecutive monthly decrease.

(Reporting by Ismail Shakil and Promit Mukherjee in Ottawa, additional reporting by Dale Smith, Steve Scherer and Divya Rajagopal; Editing by Peter Graff and Chizu Nomiyama)