Inflation keeps cooling. Does that mean we’re done with interest rate hikes?

Click to play video: 'Canada’s inflation drops below 6% for 1st time in almost a year'
Canada’s inflation drops below 6% for 1st time in almost a year
WATCH: Canada's inflation drops below 6% for 1st time in almost a year – Feb 21, 2023

A bigger-than-expected slowdown in Canada’s inflation rate last month should give the Bank of Canada enough breathing room to hold interest rates steady at its decision next month, according to some economists.

Annual inflation slowed to 5.9 per cent in January despite upticks in both gasoline and food prices, Statistics Canada said Tuesday.

Gas prices saw the biggest jump month-to-month in the Consumer Price Index report, the agency said, up 4.7 per cent from December.

Overall food prices rose at a slightly higher rate than in December, up 10.4 per cent in January compared with 10.1 per cent the month before.

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The price of food purchased from the grocery store was again up 11.4 per cent, matching a 40-year-high. Prices were higher for meat (up 7.3 per cent), bakery products (up 15.5 per cent), dairy (up 12.4 per cent) and fresh vegetables (up 14.7 per cent).

Statistics Canada said the cost of fresh or frozen chicken rose 9.0 per cent annually, owed largely to avian flu outbreaks, supply chain kinks and strong seasonal demand.

Click to play video: '1 in 4 Canadians can’t afford $500 unforeseen expense as inflation bites: report'
1 in 4 Canadians can’t afford $500 unforeseen expense as inflation bites: report
Many food categories saw prices accelerate from December.

The January inflation reading marks a further cooling from the 6.3 per cent headline rate seen in December and was below most economists’ forecasts; RBC had expected inflation to clock in at 6.1 per cent last month.

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StatCan said that lower cell prices were among the biggest factors bringing down the inflation rate in January.

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Cellular services prices were down 7.9 per cent annually in January as some Boxing Day sales stretched into the new year, the agency said.

While Canadians continue to pay more on their mortgages amid higher interest rates from the Bank of Canada, StatCan said year-over-year growth in shelter prices also decelerated in January as the housing market kept cooling.

Bank of Canada good for rate pause, economists say

The cooler-than-expected inflation reading to start 2023 clears the path for the Bank of Canada to stick to its conditional pause on interest rate hikes next month, economists say.

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The central bank has been in the midst of rapidly raising interest rates over the past year in an effort to take steam out of the economy and tamp down inflation. The Bank’s benchmark rate rose another quarter of a percentage point in January, marking a total 425 basis points of rate hikes since last March.

But the Bank of Canada signalled it could be ready to pause its tightening actions and let its rate increases to-date take hold in the economy. It said it would watch to see if inflation was falling in line with its forecast, which now sees headline CPI to hitting three per cent by mid-year, en route to its two per cent target.

Click to play video: 'Business News: Bank of Canada ‘pausing’ further interest rate hikes'
Business News: Bank of Canada ‘pausing’ further interest rate hikes

Bank of Montreal Chief Economist Doug Porter said in a note to clients Tuesday morning that the January inflation figures are “clearly a big step in the right direction.”

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Short-term metrics on core inflation, which the central bank watches carefully in making its rate decisions, are tracking well, Porter said. This “milder report” should give the Bank “some comfort” to continue with its pause, he concluded.

CIBC Senior Economist Andrew Grantham also said in a note that the weaker core readings “suggest that the Bank of Canada has already done enough to bring inflation under control.”

He also said the January CPI figures, alongside strong retail figures from the past few months, suggest the central bank might not have to engineer a recession to bring inflation back to its two per cent target.

“That supports our call for no further interest rate hikes, but also no cuts until early 2024,” he wrote.

Markets toned down their bets on another rate hike after the release of the inflation figures. Money markets now see a roughly 80 per cent chance that the Bank of Canada will raise interest rates again this year, according to Reuters.

TD Bank Senior Economist James Orlando said one complicating factor for the central bank is the strong jobs report for last month, which showed the economy added 150,000 net jobs to the already tight labour market.

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Bank of Canada Governor Tiff Macklem has said Canada’s low unemployment rate is unsustainable and will need to rise before inflation is fully tamed.

Orlando thinks the solid inflation print on Tuesday will be sufficient to maintain the conditional hold on rate hikes, however.

“Given the improvement in inflation data today, the BoC will not feel rushed to jump back in with another rate hike just yet,” he wrote in a note Tuesday.

— with files from Reuters

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