Lower-than-expected inflation does not speed up likelihood of rate drops, according to observer
The latest inflation data may not guarantee that the Bank of Canada will be cutting down interest rates anytime soon, according to Deloitte Canada’s chief economist.
Dawn Desjardins told the Financial Post that while price relief on important items like gasoline and food had arrived, shelter prices were continuing to increase caused by sharp accelerations in rent and mortgage interest costs.
Desjardins said that the Bank of Canada was focused on measures that looked at underlying inflation pressures, which have not slipped below the 3% mark but have slowed down.
She noted that while the central bank’s interest rate increases have boosted the interest costs for Canadians in debt, it was for the sake of slowing the demand for other goods and services as well as cooling the economy so that supply and demand could be more aligned, especially with their 2% target.
“Canada does have significant increased demand for housing, in particular rental housing, and yet supply has not been able to keep up,” said Desjardins.
“A few reasons, of course, for that: some of it reflects labour shortages and not enough workers in the construction industry to actually get these homes made. We also know that these higher costs are impacting builders. They, too, have to source funding so again, an increase in the cost,” she added.
With the inflation data from January, Desjardins believed that the anticipated central bank cuts on interest rates will occur around June.
“I think it still is the case that they want to see a few months of inflation below 3% really leaning towards the 2.5%, 2% rate. They want to see service sector inflation ease because service sector inflation is still running at over 4%,” said Desjardins.
She further noted that inflation in the service sector reflected what was happening in the labour market as wages in the industry were strongly increasing.
