Subdued Canadian Inflation Picture Expected In 2011

Date: Tuesday, January 25th, 2011

By Courtney Tower

OTTAWA (MNI) – Canada’s inflation picture, although it rose to 2.4% on an annual basis in September from November 2.0% rate which the Bank of Canada targets as most favorable, is expected to remain subdued in its key parts and not persuade the central bank to raise its policy rates very soon.

The Statistics Canada report on December inflation was followed by a drop of half a cent in the Canadian dollar up to just before noon Tuesday, down .50 cents to 100.090 to the United States dollar.

Inflation in Canada ended the year at 2.4%, where it had been in October, up from the 2.0% recorded in November. Energy prices led the rise, and food prices were up, but excluding these two inflationary pressures were mild in December. Prices overall rose very modestly, to an annual increase of 1.6% in December from 1.5% in November. Price pressures remained modest among most major parts of the Consumer Price Index basket of goods.

Core inflation, which the Bank of Canada relies on as a key factor in setting its policy overnight rate and in which volatile elements such as food and energy are stripped out, rose 1.5% in December from the levels of December a year ago, up from 1.4% in November. It remains well below the Bank’s 2.0% target.

“Today’s soft inflation report suggests there is little urgency for the Bank of Canada to lift the overnight rate from its current low level of 1.0%,” economist Diana Petramala of TD Economics wrote to clients.

Petramala sees energy prices abating in coming months with crude oil prices staying flat, the Canadian housing market cooling, consumer spending being moderate, and the Canadian dollar above par with the U.S. dollar. All of that, she believes, will keep inflation in check and not hitting the 2.0% target until mid 2012. As a result, she wrote, the Bank of Canada would not likely begin to raise its key rate until July.

The Royal Bank of Canada takes a similar view of the prospects for muted inflation in Canada but projects that the slow pace of economic growth in Canada of the last half of 2010 will pick up at a faster pace than the Bank of Canada predicts.

Dawn Desjardin, assistant chief economist, says that the faster pace of recovery this year will impel the Bank to resume rate hikes, in the second quarter this year. She notes that the market has priced in the first 25-basis point increase for the third quarter of 2011 but says that the RBC believes it will come earlier.

The Bank kept the overnight rate at 1.0% on January 18, for the third successive hold at its fixed date announcements, saying that any increase in the rate “would need to be carefully considered.” It’s next announcement dates are March 1 and April 12.

** Market News International Ottawa **

Lawrence Kobescak

Lawrence Kobescak

Lawrence Kobescak, the creator behind OntarioMortgageSuperstore.com is a real estate sales representative, mortgage agent and real estate investor. OntarioMortgageSuperstore.com has reached over 240,000 Canadians since 2009. Lawrence has been quoted in the Globe & Mail and MortgageBrokerNews.ca.

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