Lower inflation in February likely to keep interest rates low
Canada’s annual inflation rate fell slightly in February, giving the Bank of Canada room to keep interest rates low over the next few months, economists say.
Statistics Canada said Friday its consumer price index edged down one-tenth of a point to 2.2 per cent in February, with rising energy and gas prices keeping inflation just above the Bank of Canada’s ideal two per cent target.
The core inflation rate, which excludes volatile items such as gas and food, fell to 0.9 per cent — its lowest level since the government started keeping records in 1984. Economists had predicted an annual core rate of 1.1 per cent and annual inflation to remain at the January level of 2.3 per cent.
It all means the country’s central bank might take its time when it comes to raising interest rates, said CIBC World Markets economist Emanuella Enenajor.
“These (inflation) numbers certainly make it less likely that a May rate hike could happen, we do have to admit,” she said.
“Such a soft core number suggests there’s less pressure for the Bank of Canada to really start hiking rates aggressively so it gives it a little more leeway.”
She said CIBC is for now sticking with its prediction that Canadians will see rates go above the current one per cent in May and that they will end up at two per cent by the end of the year.
Canada’s economic growth surpassed expectations in the last half of 2010 and the Bank of Canada may want to get ahead of any resulting spike in prices by raising interest rates and cooling lending conditions, she said.
Doug Porter, deputy chief economist at BMO Capital Markets said he believes the central bank is likely to stick with lower rates for the short term.
“Both headline and core inflation have eased since the start of the year, at least partly thanks to the lofty loonie,” he wrote in a note to investors, pointing out that Canada’s core inflation rate is lower than that of the U.S. and rest of the world.
“This is set to reverse next month, as Canada gets with the global program, but the low starting point is very favourable. Suffice it to say that this keeps the pressure well off the Bank of Canada to get back in tightening mode any time soon.”
Enenajor said the March inflation rate will likely depend on oil price movement during the rest of the month.
“However, expect both the annual headline and core rate to move higher in March on a year-on-year basis,” she said.
Prices were higher in February in six of the eight major categories tracked by the agency, but items like women’s clothing, footwear and travel tours cost less than a year earlier.
On a month-to-month basis, consumer goods were 0.3 per cent more expensive last month than in January, mostly due to higher energy and gasoline prices. Canadians paid 10.6 per cent more for energy during the year leading up to February, after posting a nine per cent increase in January.
Gas prices soared 15.7 per cent last month, on top of the already recorded 13 per cent increase in the 12 months leading up to January.
On a regional basis, Nova Scotia remained the province with the highest inflation rate at 3.4 per cent. Many people in that province use oil and other fuel to heat their homes.
Alberta continued to enjoy the most stable prices, with an inflation rate of 1.2 per cent.
Drivers in every province except Manitoba faced double-digit price increases for gasoline on a year-over-year basis. The price at the pumps was up 15.7 per cent from a year earlier.
The Canadian Press http://www.therecord.com/news/business/article/503435--lower-inflation-in-february-likely-to-keep-interest-rates-low
