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What do November’s inflation numbers mean for the Bank of Canada?

Canada's inflation rate didn't budge in November, surprising economists who expected a slowdown. The static 3.1 percent, as reported by Statistics Canada on Tuesday, has economists reevaluating the Bank of Canada's stance on potential interest rate cuts.

Contrary to the anticipated 2.9 percent, inflation held its ground, exceeding the Bank of Canada's target rate of two percent. Craig Alexander, president of Alexander Economic Views and former chief economist at TD Bank, described the latest inflation figure as "a bit of a disappointment," suggesting it might delay the Bank of Canada's decision to cut rates.

Beata Caranci, TD's current chief economist, emphasized how these figures align with Bank of Canada Governor Tiff Macklem's cautious approach regarding inflation's "stickiness." Caranci explained in a television interview on Tuesday that the Bank of Canada differs from the U.S. Federal Reserve, which appears more comfortable with the direction of its inflation numbers.

Alexander shared his perspective on interest rate hikes, stating, "What we're really debating about is when will central banks cut rates." Despite the Bank of Canada's concerns about inflation, he believes interest rate hikes are not on the table.

In an exclusive interview set to air on Friday, Macklem hinted that rates might begin to decrease "sometime in 2024" without providing a detailed timeline.

Shelter costs, especially mortgage rates, played a significant role in November's inflation increase, recording a 29.8 percent year-over-year surge, according to Statistics Canada. Alexander argued that the Bank of Canada should assess how its monetary policies, especially prior rate hikes, contribute to inflation.

Tu Nguyen, economist with RSM Canada, echoed this view, attributing the main driver of inflation to current monetary policies.

TD Bank forecasts the first Bank of Canada rate cut in April 2024, with a total decrease of 150 basis points by the end of next year. Caranci emphasized that this forecast is "a little bit more than the markets have priced in," considering the substantial economic weakening in Canada.

Caranci suggested that the Bank of Canada could hypothetically shift focus from core inflation readings to more demand-driven aspects of the Consumer Price Index (CPI). However, she believes this shift is unlikely as the Bank has shown no inclination to deviate from its main metrics.

Nguyen expects the Bank of Canada to begin cutting rates in the second quarter of 2024, with four 25-basis point rate cuts in 2024 and further reductions in 2025 to reach three percent. He considers this rate as likely reflecting the neutral policy rate in a new era of fraught supply chains, higher labor costs, and increased uncertainty.

On the other hand, Alexander anticipates rate cuts sometime next summer, contingent on economic performance. He suggested that if the economy weakens further, the Bank of Canada might cut rates sooner. However, if inflation remains persistent and economic weakness manifests as flat or meager growth, the bank may choose to stay on the sidelines.

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