Inflation dips, rate cut expected
Globe and Mail Update -OTTAWA
Thursday, April 17, 2008
An aggressive 50-basis-point interest rate cut from the Bank of Canada is more of a sure thing now that inflation for March has proven to be benign, economists say.
Total inflation was 1.4 per cent in March from a year ago, the slowest pace since in well over a year and the fourth straight month of deceleration.
The core rate of inflation, which excludes the most volatile prices such as energy and some types of food, was just 1.3 per cent over a year ago, compared to the 1.5 per cent pace recorded for February.
“These figures give Bank of Canada officials more leeway for a larger cut when they meet next Tuesday, and we are changing our call to a 50-basis point rate cut,” Goldman Sachs economist Andrew Tilton wrote Thursday in a note to clients.
Normally, the central bank moves its key rate in increments of 25 basis points (a basis point is one one-hundredth of a percentage point). But the new governor of the bank, Mark Carney, kicked off his tenure with a 50-point cut in March, with an eye on a U.S. recession, struggling Canadian exports and tame Canadian inflation.
Steep interest-rate cuts by the U.S. Federal Reserve also pressure the Bank of Canada to move aggressively, so that the spread between U.S. rates and higher Canadian rates doesn't grow and spark further appreciation of the loonie.
Mr. Carney has indicated that more interest-rate cuts are in store to bolster the Canadian economy going into 2009, but opinion among economists had been divided about whether he would move 25 or 50.
This week, however, the central bank's quarterly business outlook survey pointed to softer corporate activity in the coming months. And Thursday's consumer price numbers show there is very little to stop him from moving 50, many economists said.
“Frankly, the growth data so far do not appear as dire as some had feared, and do not necessarily mandate a larger cut on their own. So we certainly do not view a larger move as a ‘slam dunk.' But new Governor Carney has shown a willingness to act aggressively,” wrote Mr. Tilton.
The Canadian inflation picture contrasts starkly with concerns around the rest of the world that inflation is getting out of hand. On Wednesday, the United States reported that the pace of inflation was running at about 4 per cent, while China's is above 8.
Canada's inflation, however, remains mild because the strong dollar makes imports cheaper, and has prompted intense competition among retailers, economists say.
Notably, the rising currency has pushed down prices for automobiles, books and some kinds of food, said Avery Shenfeld, economist at CIBC World Markets.
Compared to a month earlier, the consumer price index for all goods rose 0.4 per cent in February, the same as the previous month. Core inflation rose 0.3 per cent on the month in March, slower than the 0.5 per cent seen in February.
For the 12-month change, the main inflationary pressure came from mortgage interest costs, which rose 8.3 per cent, even though the central bank is cutting its key lending rate. The inflation number is one more sign that the global credit crunch is taking a toll in Canada, despite attempts by the Bank of Canada to mitigate the costs.
Gasoline prices rose 7.9 per cent over the past 12 months, which is much less than the 17.1 per cent jump noted in February, Statistics Canada said.
Looking at the 12-month change in the core rate of inflation, which the Bank of Canada uses to monitor how close prices are to its 2-per-cent inflation rate target, the deceleration was mainly due to lower automobile prices, Statscan said.
By province, Ontario showed the most stable prices, with total inflation reaching just 0.8 per cent for the past 12 months – a reflection of that province's slowing economy.
In Alberta, prices came back down to earth, with total inflation at 2.9 per cent in March, over a year ago, compared to 3.5 per cent seen in February.
The highest inflation rate in March was seen in Saskatchewan, where total inflation was 3.2 per cent, pushed by a whopping 46.7 per cent annual increase in the costs of maintaining a home there. The province is in the midst of a raging real estate boom.
“Inflation remains of little concern in Canada,” said Derek Holt, economist at Scotia Capital. “Shelter and transportation costs have really been the only broad sources of upward pressure on consumer prices in Canada.”
Mr. Holt said he expects inflation to continue to decelerate in Canada as home prices cool.
Food prices in Canada rose 0.4 per cent in March compared to a year earlier, with bakery products climbing 9 per cent because of the rising cost of wheat. But the price of fresh vegetables dropped a huge 17.8 per cent, the largest annual decline in 12 years. While the strengthening dollar contributed to the drop, fresh vegetable prices spiked higher at this time last year because of extraordinary frost in California, Statscan said.
Excluding food prices at restaurants, grocery prices in Canada declined again, falling 0.3 per cent compared to a year ago.
“This benign report simply reinforces the point that Canadian inflation remains an oasis of calm amid raging global price pressures,” said Doug Porter, deputy chief economist at BMO Nesbitt Burns.
Pushing the inflation rate up, the cost of fuel oil surged almost 30 per cent over the past year, with the biggest increases seen east of Ontario.
Also, homeowners' replacement costs were up 4.8 per cent from a year ago.
But these increases were offset by a 7.1 per cent slide in prices to buy and lease vehicles. The prices were driven lower because car dealers were offering more incentives, and because manufacturers were suggesting lower retail prices than a year ago, Statscan said.
Computer equipment also got cheaper, declining 14.9 per cent in March compared to a year ago.
Economists noted that the January cut in the Goods and Services Tax makes total inflation look lower than it really is, but even accounting for the tax cut it is still well below the central bank's 2 per cent target.
The central bank is to make its next rate announcement next Tuesday, April 22.
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