Canadian Inflation Rises 3.4% in December—How Will the Bank of Canada Respond?

Statistics Canada announced that the country’s inflation rate in December ticked up to 3.4%, which is up from 3.1% in November. The increase was fueled due to gas prices and higher prices at grocery stores. Grocery prices held pat at 4.7% while prices at restaurants have risen by 5.6% over the last year.

Housing prices remain strong, rising 6% in December. Rising rent prices are also a big inflationary pressure, up 7.7% in December, up from a 7.4% increase in November. Rents are rising quickly because people, (which includes international students and temporary residents) are competing for rentals that are in short supply.

The increase was in line with what most analysts were expecting, as a result, they do not think it will force the Bank of Canada to raise its key lending rate when it meets next on January 24.

Nor do analysts expect the central bank to lower rates prematurely.

What Can We Expect for Interest Rates in 2024?

The first interest rate cut of 2024 is expected to be fueled by how fast inflation falls and the economy softens. Bay Street now thinks the Bank of Canada will introduce the first interest rate cut when it meets in either April or June.

The Bank of Canada has held its policy rate, which influences interest rates, at 5% over the past three decisions. It also cautioned that it might need to raise interest rates further to bring inflation back to its 2% target.

The central bank has said that its goal is to bring inflation down to 2% and warned that the ride could be bumpy. It doesn’t think inflation will get to the 2% target until 2025, though some think it could get there by the end of 2024.

We could look south of the border to see how the Bank of Canada acts. It’s independent of the U.S. Federal Reserve but the Bank of Canada could feel pressure to follow what goes on in the U.S.

Why? The exchange rates of the U.S. and Canadian dollar are tied to the country’s interest rates, and too much of a difference could juice inflation on trade. While opinions are divided like they are here in Canada, Wall Street thinks the Fed will announce its first rate cut in either March or June. Others don’t see the first rate cut happening until the third quarter.

Investors clearly hope the Bank of Canada lowers interest rates sooner rather than later. Immediately after announcing that December inflation ticked up, Canadian stocks tumbled, down 1% to open Tuesday, January 16 at 20,998. By Thursday, the TSX had fallen to a low of 20,659 for a three-day loss of 1.6%.

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Canadian inflation rang in at 3.4% in December, up from November’s reading of 3.1%. This might have been in line with what economists were thinking, but investors were disappointed, thinking the reading means the Bank of Canada will hold off on announcing its first interest rate cut. How will hot inflation and eventual rate cuts impact North American stocks? Ask the trading experts at Learn-To-Trade.com.

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