Inflation in focus as Bank of Canada tilts toward rate hike

Analysts looking for signs of follow-through are watching economic data closely

Inflation in focus as Bank of Canada tilts toward rate hike
The question now isn’t “if,” but “when.”

Following hints of a rate hike issued by a top Bank of Canada official last week, economists are watching inflation and retail sales numbers to be reported this week to figure out when the central bank will push through, according to the Globe and Mail.

In a speech last week, Bank of Canada Senior Deputy Governor Carolyn Wilkins said that the drag from lower oil prices is “largely behind us,” noting broadening growth across regions and economic sectors. Because of suggestions of strength in the economy, the central bank will be “assessing whether all of the considerable monetary policy stimulus presently in place is still required.”

The statement from Wilkins jolted the market, which hadn’t been expecting the current key overnight rate of 0.5% to get raised until 2018 at the earliest.

“The market is now pricing in at least one rate hike by the end of this year and another by the end of next year,” Michael Gregory, deputy chief economist at BMO Nesbitt Burns, said in a note. While BMO still isn’t expecting an increase until early 2018, Gregory acknowledged a possible move in October, or even July.

It will all depend greatly on new information that comes in. Statistics Canada will release the consumer price index (CPI) — a key inflation indicator — for May.

“While headline inflation could decelerate a tick, some improvement in core measures will help solidify the new market expectation for a [Bank of Canada] hike before the end of the year,” Andrew Grantham, a CIBC World Markets economist, said in a note.

CIBC expects the headline CPI to rise 1.5% year-over-year in May — a shade lower than April’s 1.6% year-over-year growth — because of lower gasoline prices. However, it said higher food prices and overall strength in the economy could push inflation higher in the second half of the year.

According to BMO senior economist Benjamin Reitzes, food “tends to be strong in May, and could nearly end the deflation in that sub-index … Also watch for a big gain in home replacement costs after the new home price index surged in the prior month.” Reitzes said he expects the central bank to overlook further softness in consideration of a rate hike.

However, not all analysts are bullish. “The ink is barely dry on the Bank of Canada’s more hawkish bias shift,” said Derek Holt, head of capital markets economics at Bank of Nova Scotia, in a note. Pointing out that this week’s data could be more dovish, Holt reported a tame inflation outlook of just 1.3% year-over-year growth in the CPI for May.

Scotiabank also expects April retail sales numbers, set to come out Thursday, to be soft. Citing lower volumes of new cars and trucks sold during the month, the bank predicted no growth from March and just 0.2% growth if auto sales are excluded. BMO and CIBC are slightly more optimistic, projecting a 0.3% rise in headline retail sales.

In the US, the Federal Reserve raised its benchmark rate by a quarter-point last week.

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