Latest inflation data keeps BoC on course for January rate cut

Canada’s annual inflation rate dipped to 1.8% last month as the federal government’s GST break helped push price growth lower, keeping an interest rate cut by the Bank of Canada next week firmly on the table.

Statistics Canada said on Tuesday that lower restaurant and liquor prices as a result of that temporary pause on taxes, introduced in mid-December, had contributed most strongly to the overall slowdown. Without that measure, inflation would have jumped to 2.3%.

Shelter costs ticked marginally lower, declining by 0.1% compared with November but remaining elevated at 4.5%, while transportation and health and personal care costs moved higher.

Rents also slid compared with the same month in 2023, falling to 7.1% – and the overall reading suggests the Bank of Canada could be ready to cut at next week’s meeting, according to BMO chief economist Doug Porter.

He said in a note to clients that the December reading may be “just good enough to allow the Bank of Canada to trim next week, for risk management purposes,” while TD Economics said the central bank is still on track to cut its key rate by 25 basis points at every other rate decision throughout the year.

RBC economists Nathan Janzen and Abbey Xu said price growth had shown “mixed” signs in December but remained consistent with signs of underlying easing overall – and keep a Bank of Canada cut on the table.

“The CPI data will be impacted by the tax holiday into February, but a weakened Canadian GDP and elevated unemployment rate (with the potential for protectionist US trade policy to make both worse) is pushing inflation expectations from businesses and households lower,” they said.

“That leaves the risks on price growth tilted to the downside and argue for further BoC interest rate cuts.”

Source CMP
By Fergal McAlinden