Interesting article in the Vancouver Sun today predicting that the Band of Canada is unlikely to raise rates. This is great news for those in variable rate mortgage products.
BoC unlikely to raise rates, despite inflation jump
Vancouver Sun
Published: Thursday, August 21, 2008Inflation in Canada clocked in at 3.4 per cent in July, the highest level in more than five years. Yet with the economy still weak, economists agree that the Bank of Canada is unlikely to attempt to rein in inflation by raising its bank rate in September.
The biggest contributor to July's inflation was gas prices, which were 28.6 per cent higher across the country last month compared to a year earlier, Statistics Canada reported Thursday.
Food prices and mortgage interest costs were also up, the report said.
On the other side of the balance sheet were drops in the prices of vehicles and computer equipment, Statistics Canada said.
In British Columbia, the inflation rate was slightly below average at 3.3 per cent despite an above-average increase in the cost of gas, which rose 31.5 per cent in the province.
The gas-price increase may reflect the provincial government's new carbon tax, which was implemented on July 1 and added 2.4 cents a litre to the price of gas, said Bernie Magnan, chief economist with the Vancouver Board of Trade.
The province's lower-than average inflation rate may be due to B.C. residents having to spend such a large portion of their income on housing that businesses have a hard time raising prices for other goods, Magnan said.
With the price of gas expected to drop in August, inflation is likely to ease too, he said.
But Derek Holt, vice-president of Scotia Capital Economics, said inflation is likely to stay high because it is measured year over year. So even as gas prices fall, they remain higher than they were a year ago.
Holt counselled not paying too much attention to the year-over-year numbers and focus instead on month-to-month comparisons.
While inflation was 3.1 per cent in June compared to a year earlier, prices were up 0.8 per cent from May. But price rose only 0.3 per cent from June to July, an indication that inflation is actually cooling, Holt said.
Taking the volatile elements out of the equation, such as fuel and fruits and vegetables, inflation was only "a remarkably well-behaved" 1.5 per cent, Holt said.
"So that suggests that even though commodities were elevated there really wasn't any pass-through of those higher commodity prices by businesses into the broader spectrum of consumer pricers," Holt said.
However, B.C. may start experiencing higher than average inflation in the coming months because of the buildup to the Olympics, he added.
Cities hosting Olympics usually have higher inflation rates leading up to and after the Olympics because of the work involved getting ready and the people and business the games attract, he said.
So far B.C. has remained "surprisingly well-anchored," Holt said.
That could be due in part to the dampening effect a weak U.S. economy has on the province, especially its forest sector, he said.
Both Holt and Magnan believe that despite July's high inflation rate - the highest since March 2003 - the Bank of Canada is unlikely to change its overnight target bank rate in September.
While the central bank's focus is a target inflation rate of around two per cent it also has to ensure any rate changes don't hurt the economy, they said.
Holt added that while the bank will hold rates steady in September, it will communicate its intention to focus on the economy, thus paving the way for rate cuts, despite the high inflation numbers, as soon as October.
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