Canada October inflation may soften, rate hikes on shelf

Fri Nov 16, 2012 12:31pm EST
 
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OTTAWA (Reuters) - Inflation likely eased in Canada in October on lower gasoline prices and sluggish economic growth, forecasters said on Friday, a scenario that would help ensure the Bank of Canada will refrain from interest rate hikes any time soon.

The median forecast in a Reuters poll was for the consumer price index to edge up by 0.1 percent from September for a year-over-year rate of just 1.1 percent, down from 1.2 percent in September.

"Energy will be a drag on inflation for the month of October ... Growth is just really too slow at this point to stoke underlying inflationary pressure and that trend is expected for October as well," said Emanuella Enenajor, economist at CIBC World Markets.

Core inflation, which reveals underlying price trends by stripping out gasoline and other volatile items, is also seen softening slightly, to 1.2 percent from 1.3 percent in September.

Inflation averaged 2.9 percent in Canada in 2011, but it has been much tamer this year, staying below the Bank of Canada's 2 percent target since April.

The expectations for October are in line with the Bank of Canada's view that headline inflation will come in at about 1.5 percent in the fourth quarter and core inflation at 1.6 percent.

"You're almost a full percentage point below the target," said Enenajor. "They do expect it to pick up to some extent going forward, but at this point there's no near term pressure for them to act."

The Bank of Canada has been an outlier among the world's major economies in signaling for the past six months that it will hike rates. Last month it toned down its hawkish language somewhat to say monetary tightening is "less imminent", although its preference remains to raise, not lower, rates.

A Reuters poll on October 24 showed Canada's primary securities dealers don't expect a rate move by the bank until the fourth quarter of 2013.

Yields on overnight index swaps, which trade based on expectations for the policy rate, show traders have priced in a marginal chance of a rate cut next year. BOCWATCH

(Reporting by Louise Egan; Polling by Teresa Ruiz; Editing by Peter Galloway)