Jury still out on a September interest rate hike: analysts

Latest inflation news 'not a good report for the Bank of Canada'

Jury still out on a September interest rate hike: analysts

Canadian experts are sharply divided over what the latest inflation figures mean for the central bank’s policy interest rate.

The headline inflation rate went back up from 2.8% in June to 3.3% in July, spurred mainly by a 0.6% upswing in consumer prices.

Doug Porter, chief economist at BMO Capital Markets, pegged the chance of the Bank of Canada raising rates next month at around 30% as a result of this uptick.

“Notably, Canada’s headline inflation rate is now above the US (3.3% vs 3.2%) for the first time since pre-pandemic days,” Porter said in a new analysis. “There’s no sense sugarcoating this one: it is not a good report for the Bank of Canada. While the bank had anticipated a back-up in headline inflation in their latest forecast, July’s result is already at their call for all of Q3 (3.3%), and the August reading is almost certainly set to be even higher.”

Still, Porter is expecting the recent increase in Canada’s unemployment rate coupled with slower spending to build a stronger case for another BoC rate pause next month.

“Prior to the decision, we’ll get plenty of signs of how growth held up in the summer (including the Q2 GDP release on Sep. 1) which will help shape the decision,” he said.

Bank of Canada’s target is still a long way off

Desjardins economist Tiago Figueiredo said that the July inflation figures indicate that the central bank is still some distance away from achieving its inflation target of 2%.

July’s inflation numbers “might nudge the balance of risks slightly to the upside as far as the odds of a September rate hike are concerned,” Figueiredo told BNN Bloomberg. “However, weaker signs in GDP and jobs data recently will also factor into the analysis. Barring any major surprise in the upcoming activity data, we expect the Bank of Canada to stay sidelined on Sept. 6.”

Former BoC Governor David Dodge recently said that interest rates need to remain elevated for a prolonged period if the BoC is to succeed in reaching its inflation target.

“What [disinflation] will require is continued – rather elevated – interest rates right through 2024, right into 2025,” Dodge said. “It makes it very hard to achieve disinflation when we continue to have growth and when we continue to have by historical standards pretty robust labour markets.”