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The Bank of Canada’s rate hike strategy worked, CPI growth slowed again in August | Anue Juheng-International Political Economy

The Bank of Canada’s rate hike strategy worked, CPI growth slowed again in August | Anue Juheng-International Political Economy
The Bank of Canada’s rate hike strategy worked, CPI growth slowed again in August | Anue Juheng-International Political Economy

Affected by falling gasoline prices, Canada’s inflation rate in August announced on Tuesday (20th) fell for the second consecutive month, beating market expectations. There is also breathing room for monetary policy.

Statistics Canada (Statistics Canada) data released on Tuesday showed that the consumer price index (CPI) rose 7% in August, not only lower than market expectations of 7.3%, but also lower than the previous value of 7.6% in July and 40 in June. A new high of 8.1%. Excluding the volatile core CPI, annual growth in August fell to 5.8% from 6.1% in July, while the 0.3% drop was the largest since the early days of the coronavirus outbreak.

On a monthly basis, Canada’s CPI in August increased by -0.3%, the market expected -0.1%, and the previous value in July was 0.1%; the core CPI increased by 0%, compared with the previous value of 0.5%. In addition, the average of the Bank of Canada’s three key inflation measures eased to 5.2% from a revised record high of 5.4% in July.

Gasoline, housing prices fall as inflation-cooling contributors

The authorities said the slowdown in CPI growth this time was mainly due to a drop in gasoline prices and a slowdown in the housing index, but inflation data for August was still well above the central bank’s 2% target. It is worth noting that Canada’s food price index in August increased by 10.8% year-on-year, the largest increase since August 1981.

But prices are still rising faster than wages, with average Canadian wages rising 5.4% in August from a year earlier, and authorities said the gap was smaller in August than in July, despite a decline in the purchasing power of Canadian consumers.

In addition, recent economic data shows that the Canadian economy has slowed sharply from a strong first half of the year. Employment levels unexpectedly fell for a third straight month in August, the unemployment rate rose to 5.4% from a record low of 4.9%, and economic growth has stalled since April.

Future rate hikes are expected to slow

While the August inflation data is unlikely to derail the Bank of Canada’s bets on further rate hikes in the coming weeks, the slowdown in inflation suggests the central bank’s early rate hikes are cooling the economy, with demand slowing enough to defuse price pressures quickly, while There is no need to raise interest rates significantly to put interest rates into restrictive territory.

The Bank of Canada raised interest rates by another 3 yards (75 basis points) two weeks ago, following an unexpected 4-yard (100 basis point) hike in July, to 3.25%, the most aggressive rate hike the central bank has ever raised. In one cycle, the central bank has raised its policy rate by 300 basis points in just 6 months, and the cooling of inflation this time seems to reveal that the central bank’s policy is working, easing the pressure on future rate hikes. Market analysts believe that a small rate hike by the Bank of Canada may be the best option now.

Expert opinion

Michael Greenberg, senior vice president and portfolio manager at Franklin Templeton Investment Solutions, said the August inflation data could signal to the Bank of Canada that rate hikes are starting to work, but are nowhere near the target, but reduce the risk of a sharp hike in October. , however, the central bank has more to do.

Andrew Kelvin, Canada strategist at TD Securities, said that from the Bank of Canada’s perspective, this is still a high-inflation environment, and interest rates appear to be constrained at the moment, so the safest thing to do is to slow the pace of rate hikes and focus on the evolution of inflation expectations.

Bloomberg economist Andrew Husby believes that falling inflation in Canada is not enough to stop the central bank from raising interest rates further, but strengthening the central bank’s rate of interest rate hikes is expected to be slower than during the summer, coupled with the third consecutive decline in employment in August and the Unemployment has climbed and the Bank of Canada is expected to raise rates by 2 yards (50 basis points) at its October rate meeting.

Tags: Bank Canadas rate hike strategy worked CPI growth slowed August Anue JuhengInternational Political Economy

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