If the Bank of Canada (BoC) is looking for a new mantra during these trying times, might we suggest, “What goes up must come down… to the 2% inflation target.”
What happened: Canada's annual inflation rate in August jumped to 4% from 3.3% in July, increasing the odds of a rate hike at the BoC’s next meeting on October 25. To make matters worse, core measures that filter out extreme price changes also rose to 4% from 3.75%.
-
According to a note by Scotiabank Economist Derek Holt, the ongoing narrative that mortgage interest and gas prices are driving inflation is “complete, utter, rubbish.”
- Both have been largely excluded from the BoC’s preferred measures. Meanwhile, grocery prices, which have come under fire this week, actually cooled to 6.9%.
Why it matters: According to Holt, the BoC is facing a serious credibility problem. Recent surveys show that consumers and businesses have little faith that the bank will achieve its 2% inflation target anytime soon, which presents a risk to Canadian markets and institutions.
Big picture: Canadians are still feeling price increases where it hurts most: Shelter. Rent was up 6.5% year-over-year, compared to 5.5% in July, and mortgage interest costs — up over 80% since the BoC started raising interest rates — continue to rise.
- At three Canadian banks, 20% of residential mortgage borrowers are seeing their balances grow as their monthly payments no longer cover the interest they owe.
Bottom line: A lot could change after a fresh round of economic data, due next month. But between accelerating wage gains, collective bargaining pressures, falling labour productivity, and unexpectedly high immigration numbers, a rate pause is starting to feel unlikely.—SB
