Canada’s annual inflation rate increased more than expected in July. Analysts said this development could tempt the Bank of Canada to increase interest rates again.
The Consumer Price Index was 3.3 per cent higher in July than it was in 2022 a year earlier. It moved up from 2.8 percent in June and became higher than the three percent forecasted by a consensus of economists surveyed by Bloomberg.
Though it is below the 8.1 percent inflation rate of last June, it’s still higher than the Bank of Canada’s inflation target of two percent.
The highest sole contributor to increased inflation was higher mortgage interest, which increased by 30.6 percent. If mortgage interest is excluded, the annual rate of inflation stood at 2.4 percent in July.
TD Senior Economist, Leslie Preston, said the numbers could pressure the Bank of Canada to increase its key overnight lending rate again.
In a research note that was issued after the inflation rate increased, Preston said: “Domestic demand in Canada’s economy continues to hum along, and as a result we expect progress on inflation to remain disappointing through the remainder of the year. This is pushing up expectations that the BoC may pursue another rate hike in the fall months.”
Chief Economist of BMO, Doug Porter, said that while the Bank of Canada had likely been anticipating at least some increase, the size of the increase makes it more difficult for the Bank to stay on the sidelines.
Porter said: “There’s no sense sugarcoating this one — it is not a good report for the Bank of Canada. We still believe that … the BoC would prefer to move to the sidelines in September and give prior hikes time to work, but the inflation figures will make it a tougher call.”
Porter stated that rate of inflation in Canada is now higher than the U.S.’s (3.3 percent vs. 3.2 percent) for the first time since before the start of COVID-19 pandemic.
In March, the Bank of Canada started an aggressive rate-hike campaign in an effort to drive inflation down. Before the campaign, the overnight rate sat at 0.25 percent. It is currently at five per cent, its highest rate in 22 years.
The theory is if money is more expensive to borrow, consumers and businesses will spend less. This will drive prices down and slow the economy.
After increasing the rate by 25 basis points in July, Bank of Canada governor Tiff Macklem didn’t rule out further increases, saying they’d be based on data.
Macklem said: “What we’re saying now is we’re taking it one decision at a time. We’re doing our best to balance the risks of under and overtightening.”
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