Economists urge interest rate cut despite jump in core inflation
Core inflation rose to its highest point in 41 months in October, but a closer analysis of the regional dynamics behind the national inflation rate suggests the Bank of Canada should think about cutting its key interest rate soon, economists say.
The annualized core inflation rate, which excludes the most volatile prices such as energy and food, touched 2.3 per cent in October, the highest point since May, 2003. But the inflation picture looks much more benign when Alberta housing prices are excluded. Calculations by National Bank Financial Inc. peg the core inflation rate, excluding Alberta housing, at a peaceful 1.8 per cent.
“In our opinion, this development argues for a great deal of caution for the future conduct of Canadian monetary policy,” writes NBF economist Stéfane Marion. “Core [inflation] may be trending up in Canada but our central bank should not be setting interest rates in response to a relative price change in one province.”
Rather, since economic growth has slowed down quickly in the second and third quarter in Canada, and will likely remain lacklustre in the fourth quarter, the central bank should be prepared to cut rates in 2007, Mr. Marion argues.
Total inflation in October was up a relatively low 0.9 per cent compared with a year earlier, but that’s mainly because energy prices were sky-high back then, in the wake of hurricane Katrina.
The Bank of Canada is probably paying far more attention to the core inflation rate than the total inflation rate, economists said, and core is poised to be higher than the central bank had expected in coming months. The bank has projected an average core inflation rate of 2.1 per cent in the fourth quarter, but on the heels of yesterday’s 2.3-per-cent rate, many economists are calling for a peak well above 2.1 this quarter.
The central bank’s official inflation goal is to keep the rate within a band of 1-to-3 per cent, but bankers have made it clear they are uncomfortable with inflation that hovers above the 2-per-cent point.
But while high numbers in the next few months will likely raise the blood pressure of central bankers, the bank should keep in mind that economic growth is slowing, especially in Central Canada, said Doug Porter, deputy chief economist at BMO Nesbitt Burns Inc.
Not all economists foresee lower rates on the horizon.
Ted Carmichael, chief economist at J.P. Morgan Securities Canada Inc., predicts a weakening dollar, will drive up inflation, and prompt the central bank to raise rates.