Rate strategist questions BoC's inflation timeline

National Bank analyst sees a clear path to the 2% target within months

Rate strategist questions BoC's inflation timeline

Recent cooler-than-expected inflation figures have prompted some financial experts to question the Bank of Canada's cautious outlook on when inflation will hit its target, hinting that interest rate cuts could be on the horizon much sooner than anticipated.

The BoC had previously projected in its January Monetary Policy Report that inflation wouldn't near its 2% goal until 2025. However, National Bank of Canada Financial Markets rates strategist Taylor Schleich believes the target could be reached as early as the third quarter of this year.

In a note on February 22, Schleich expressed his long-standing doubts towards the BoC’s timeline for achieving its inflation target: "We’ve been sceptical for a while that it would take that long to get ‘home’ on inflation and this week’s softer-than-expected CPI report reinforced that scepticism."

This statement came after Statistics Canada reported on February 20 that the consumer price index (CPI) growth had slowed to 2.9%—the first drop into the Bank of Canada's target range of 1% to 3% since mid-2021.

Read next: CPI report indicates lingering inflation pressures

Schleich points out that reaching a 2% inflation rate might not require any further deceleration from its current pace.

"To get 2% inflation, one doesn’t need to assume inflation decelerates at all from the recent run-rate," he explained. By simply continuing the average monthly increase from the past six months, which stands at +0.2%, Schleich the target is achievable by the third quarter.

Even with "problematic" shelter inflation, which saw a 6.2% increase in January from 6% in December, and significant jumps in rents and mortgage interest costs, Schleich maintains that the 2% inflation target is attainable within the year. He suggests that should the economy underperform its potential or if inflation rates revert to their pre-pandemic average of 0.19% from 2010 to 2019, the target could be reached even sooner.

Given these perspectives, Schleich sees the Bank of Canada's potential rate cuts, forecasted at 125 basis points for 2024, as quite plausible. National Bank predicts that the central bank could begin reducing rates as early as June and possibly at every meeting in the latter half of the year, especially if the economy contracts and unemployment increases.

"We still have conviction the BoC can out-ease the Fed in 2024,” Schleich said.

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