Higher-than-expected inflation is surely turning heads at the Bank of Canada, raising the risk of an earlier hike in interest rates, says Scotia Capital.
Core CPI rose to 2.1% year-over-year and saw an annualized 4.2% month-over-month gain on a seasonally adjusted basis. The February numbers represent the first time core inflation has surpassed 2% since December 2008.
While the details are mixed in terms of the components underlying the move, it is nonetheless pretty difficult to argue that emergency rates in Canada are still necessary, economists Derek Holt and Karen Cordes Woods told clients.
They expect the Bank of Canada’s projection of core CPI at 2% y/y to move forward from the third quarter to the second quarter of 2011. This revision will likely be addressed in the central bank’s Monetary Policy Report due out on April 22, two days after its next statement.
“Add stronger than expected growth, a more hawkish Bank of Canada and further improvement in the funding and liquidity environment into the mix and the BoC has what it needs to hike rates at the end of Q2, the economists said. “While that is not our base case assumption, with our own projection for the first hike in Q3 of this year, the reasons for of an earlier hike are growing.”
Acknowledging that Canadian inflation is again heating up, Krishen Rangasamy of CIBC World Markets feels that like the deflation hype during the recession, inflation fears during the recovery might be a little overblown.
The economist noted that while core inflation did surprise to the upside, the month of February saw a staggering 19% increase in traveler acommodation, likely due to the Olympics.
“One month does not make a trend, even more so, when considering the ‘Olympic effects’”, he said in a note.
Mr. Rangasamy noted that five of the eight broad CPI categories were either down or flat. The 0.4% rise in headline CPI in February (0.1% after seasonal adjustment) was also much lower than the monthly gain in the same month last year.
Given the temporary factors he indicated, the economist doesn’t expect a change in the Bank of Canada’s stance to until the end of the second quarter.
“While we believe that the Bank will start its tightening cycle in July, to bring interest rates to more neutral levels, and in line with the improving economic picture, we suspect that the BoC could temporarily take a pause, perhaps in Q4, gauging the effects of the strong C$ and softer growth.”