Canada’s inflation rate witnessed a slight decline to 3.8 per cent last month, presenting a glimmer of hope amidst persistent economic challenges. The decrease in price pressures across various sectors of the economy could pave the way for the Bank of Canada to maintain its current key interest rate, experts believe.
On Tuesday, Statistics Canada disclosed its most recent consumer price index report, indicating that inflation had managed to slow down in September following its upsurge to four per cent in August, which was viewed as an encouraging development by economists.
The agency’s report highlighted that the main factors that pushed annual inflation last month included mortgage interest costs, rent, restaurant food, gasoline, and electricity among others. Conversely, deflationary pressures were observed in sectors such as telephone services, natural gas, air transportation, childcare and housekeeping services, and furniture.
Analysts, post assessing the current inflation data, have stated that it furnishes additional substantiation that the Bank of Canada, gearing up for the rate decision scheduled for Oct. 25, might just remain non-committal and patiently anticipate further deflation.
The central bank’s key interest rate currently stands at five per cent, marking its peak since 2001. The Bank of Canada is expected to diligently observe the core inflation measures, which strip out price volatility, in order to predict the future course of inflation.
According to the inflation report, the central bank’s preferred core measures have slowed down since August but continue to remain unnervingly elevated.
Tiff Macklem, the governor of the Bank of Canada, has recently verbalized that he anticipates the governing council’s discussions to center on whether the bank should exercise patience with inflation, or act without delay to restrict price growth.
While the latest inflation figures do offer some solace to the central bank, complete relief will only be achieved when inflation progresively moves closer to the desired two per cent target.
Since March 2022, the central bank has utilized higher interest rates as a tool to combat runaway inflation. Although the two per cent inflation target is yet to be achieved, the bank’s top priority is to prevent excessive hikes in rates, given that the economy has already shown signs of strain under increased borrowing costs.
Economic growth has been on a downward trajectory since last year and the labor market intensity has noticeably dwindled since the end of the COVID-19 lockdowns. Furthermore, the Bank of Canada’s latest business outlook survey reveals that business sentiment continued to wane in the third quarter, as companies predict a decline in sales growth in the upcoming year.
Economists opine that the full impact of a rate hike can take about one to two years to percolate through the economy. This fact, coupled with the increasing debt payments as share of households income, might impact the businesses’ ability to raise prices as fast and as frequently.
