The Bank of Canada Hiked Rates Again And Isn’t Finished Yet

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by 75 basis points today to 3.25% and signalled that the policy rate would rise further. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds, which puts additional upward pressure on longer-term interest rates.

While some Bay Street analysts believed this would be the last tightening move this cycle, the central bank’s press release has dissuaded them of this notion. There has been a misconception regarding the so-called neutral range for the overnight policy rate. With inflation at 2%, the Bank of Canada economists estimated some time ago that the neutral range for the policy rate was 2%-to-3%, leading some to believe that the Bank would only need to raise their policy target to just above 3%. However, the neutral range is considerably higher, with overall inflation at 7.6% and core inflation measures rising to 5.0%-to-5.5%. In other words, 3.25% is no longer sufficiently restrictive to temper domestic demand to levels consistent with the 2% inflation target.

As the Bank points out in today’s statement, though Q2 GDP growth in Canada was slower than expected at 3.3

%, domestic demand indicators were robust – “consumption grew by about 9.5%, and business investment was up by close to 12%. With higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic.”

Wage rates continue to rise, and labour markets are exceptionally tight, with job vacancies at record levels. We will know more on the labour front with the release of the August jobs report this Friday. But the Bank is concerned that rising inflation expectations risk embedding wage and price gains. To forestall this, the policy interest rate will need to rise further.

Traders are now betting that another 50-bps rate hike is likely when the Governing Council meets again on October 25th. There is another meeting this year on December 6th. I expect the policy rate to end the year at 4%.

Bottom Line

The implications of today’s Bank of Canada action are considerable for the housing market. The prime rate will now quickly rise to 5.45%, increasing the variable mortgage interest rate another 75 bps, which will likely take the qualifying rate to roughly 7%.

Fixed mortgage rates, tied to the 5-year government of Canada bond yield, will also rise, but not nearly as much. The 5-year yield has reversed some of its immediate post-announcement spike and remains at about 3.27% (see charts below). Expectations of an economic slowdown have muted the impact of higher short-term interest rates on longer-term bond yields. This inversion of the yield curve is consistent with the expectation of a mild recession next year. It is noteworthy that the Bank omitted the usual comment on a soft landing in the economy in today’s press release. Bank economists realize that the price paid for inflation control might well be at least a mild recession.

Another implication of today’s policy rate hike is the prospect of fixed-payment variable-rate mortgages taken at the meagre yields of 2021 and 2022, hitting their trigger rate. There is a good deal of uncertainty around how many these will be, as the terms vary from loan to loan, but it is another factor that will overhang the economy in the next year.

We maintain the view that the economy will slow considerably in the second half of this year and through much of 2023. The Bank of Canada will hold the target policy rate at its ultimate high point– at least one or two hikes away– through much of 2023, if not beyond. A return to 2% inflation will not occur until at least 2024, and (as Governor Macklem says) the Bank’s job is not finished until then.

Published by Sherry Cooper, August 17, 2022

Macklem’s Op-Ed (emphasis is mine)

NATIONAL POST COMMENT, AUGUST 16, 2022

Inflation in Canada has come down a little, but it remains far too high. After rising rapidly to reach 8.1 per cent in June, inflation as measured by the consumer price index (CPI) was 7.6 per cent in July.

The good news is that it looks like inflation may have peaked. The price of gasoline, which has contributed about one-fifth of overall inflation in recent months, declined from an average of $2.07 a litre in June to $1.88 a litre in July. And we know gas prices at the pump have fallen further so far in August. Prices of some key agricultural commodities, like wheat, have also eased, and global shipping costs have fallen from exceptionally high levels. If these trends persist, inflation will continue to ease.

The bad news is that inflation will likely remain too high for some time. Many of the global factors that have pushed up inflation won’t go away quickly enough — supply chain disruptions continue, geopolitical tensions are high, and commodity prices remain volatile. And here at home, our economy has been running too hot. As Canadians finally enjoy a fully reopened economy, they want to buy more goods and services than our economy can produce. Businesses are having trouble keeping up with demand, and that’s leading to delays and higher prices. The result is broad-based inflation. Even if inflation came down a little in July, prices for more than half of the goods and services that make up the CPI basket are rising faster than five per cent.

As the central bank, it’s our job to control inflation and that means we need to cool things down. That’s why we have been raising interest rates since March. In July, we took the unusual step of raising the policy interest rate by a full percentage point, to 2.5 per cent. Increasing our policy rate raises borrowing costs across the economy — for things like personal loans, car loans, and mortgages. And when we increase the cost of borrowing, consumers tend to borrow and spend less and save more. We need to slow down spending to allow supply time to catch up with demand and take the steam out of inflation.

One area of the economy where it is easy to see how this works is the housing market. With higher mortgage costs, housing activity has slowed quickly after unsustainable growth during the pandemic, and housing prices are moderating. As housing slows, peoples’ spending on housing-related goods and services, such as renovations and appliances and furniture, should also slow.

To tame inflation, we need to bring overall demand in the economy into better balance with supply. Our goal is to cool the economy enough to get inflation back to the two per cent target. We don’t want to choke off demand — we want to slow its growth. That’s what we call a soft landing. By acting forcefully in raising interest rates now, we are trying to avoid the need for even higher interest rates and a sharper slowing down the road.

I know some Canadians are asking, “Why are you raising the cost of borrowing when the cost of everything is already too high?”

We recognize that for many Canadians higher interest rates will add to the difficulties they are already facing with high inflation. But it’s by raising borrowing costs in the short term that we will bring inflation down for the long term. This will ultimately be better for everyone because high inflation hurts us all. It eats away at our purchasing power and makes it difficult to plan our spending and saving decisions. It feels unfair and that erodes confidence in our economy.

The best way to protect people from high inflation is to eliminate it. That’s our job, and we are determined to do it. Tuesday’s inflation number offers a bit of relief, but unfortunately, it will take some time before inflation is back to normal. We know our job is not done yet — it won’t be done until inflation gets back to the two per cent target.

Tiff Macklem is governor of the Bank of Canada

Bottom Line

I published Macklem’s statement in its entirety to do it justice. You can decide whether you think the overnight rate will go up by 50 vs 75 bps on September 7th, but undoubtedly it will go up. It is also clear that the Bank will not cut the policy rate until inflation is at the 2% target. So don’t assume that variable mortgage rates will decline quickly in response to a slowdown in the economy. The Bank’s emphasis on the housing slowdown being an essential precursor to the reduction in overall economic activity portends an extended period of credit stringency.

This is a sea change in the economy. This is the end of a forty-year bull market in bonds triggered by the disinflationary forces of globalization, cheap emerging market labour and rapid technological advance. It is also the end of very cheap credit. Household balance sheets will feel the pinch. Recent home borrowers who benefited from the record-low mortgage rates for the two years beginning in March 2020 will increasingly feel the constraint of higher borrowing costs on their discretionary spending. Ultimately, this will return inflation to its 2% target, but it will take a while.

It was widely expected that US consumer price inflation would decelerate in July, reflecting the decline in energy prices that peaked in early June. The US CPI was unchanged last month following its 1.3% spike in June. This reduced the year-over-year inflation rate to 8.5% from a four-decade high of 9.1%. Oil prices have fallen to roughly US$90.00 a barrel, returning it to the level posted before the Russian invasion of Ukraine. This has taken gasoline prices down sharply, a decline that continued thus far in August. Key commodity prices have fallen sharply, shown in the chart below, although the recent decline in the agriculture spot index has not shown up yet on grocery store shelves. US food costs jumped 1.1% in July, taking the yearly rate to 10.9%, its highest level since 1979.

The biggest surprise was the decline in core inflation, which excludes food and energy prices. The shelter index continued to rise but did post a smaller increase than the prior month, increasing 0.5 percent in July compared to 0.6 percent in June. The rent index rose 0.7 percent in July, and the owners’ equivalent rent index rose 0.6 percent.

Travel-related prices declined last month. The index for airline fares fell sharply in July, decreasing 7.8%. Hotel prices continued to drop, falling 2.7% on the heels of a similar decrease in June. Rental car prices fell as well from historical highs earlier this cycle.

Bottom Line

The expectation is that the softening in inflation will give the Fed some breathing room. Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge. They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.

Treasury yields slid across the curve on the news this morning while the S&P 500 was higher and the US dollar plunged. Traders now see a 50-basis-point increase next month as more likely than 75. Next Tuesday, August 16, the July CPI will be released in Canada. If the data show a dip in Canadian inflation, as I expect, that could open the door for a 50 bps rise (rather than 75 bps) in the Bank of Canada rate when they meet again on September 7. That is particularly important because, with one more policy rate hike, we are on the precipice of hitting trigger points for fixed payment variable rate mortgages booked since March 2020, when the prime rate was only 2.45%. The lower the rate hike, the fewer the number of mortgages falling into that category.

A Super-Sized Rate Hike, Signalling More To Come 

The Governing Council of the Bank of Canada raised its target for the overnight policy rate by a full percentage point to 2-1/2%. The Bank is also continuing its policy of quantitative tightening (QT), reducing its holdings of Government of Canada bonds, which puts additional upward pressure on longer-term interest rates.

In its press release this morning, the Bank said that “inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months… While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than 5%.”

The Bank is particularly concerned that inflation pressures will become entrenched. Consumer and business surveys have recently suggested that inflation expectations are rising and are expected to be higher for longer. Wage inflation has accelerated to 5.2% in the June Labour Force Survey. The unemployment rate has fallen to a record-low 4.9%, with job vacancy rates hitting a record high in Ontario and Alberta.

Central banks worldwide are aggressively hiking interest rates, and growth is slowing. “In the United States, high inflation and rising interest rates contribute to a slowdown in domestic demand. China’s economy is being held back by waves of restrictive measures to contain COVID-19 outbreaks. Oil prices remain high and volatile. The Bank expects global economic growth to slow to about 3½% this year and 2% in 2023 before strengthening to 3% in 2024.”

Further excess demand is evident in the Canadian economy. “With strong demand, businesses are passing on higher input and labour costs by raising prices. Consumption is robust, led by a rebound in spending on hard-to-distance services. Business investment is solid, and exports are being boosted by elevated commodity prices. The Bank estimates that GDP grew by about 4% in the second quarter. Growth is expected to slow to about 2% in the third quarter as consumption growth moderates and housing market activity pulls back following unsustainable strength during the pandemic.”

In the July Monetary Policy Report, released today, the Bank published its forecasts for Canada’s economy to grow by 3.5% in 2022–in line with consensus expectations–1.75% in 2023 and 2.5% in 2024. Some economists are already forecasting weaker growth next year, in line with a moderate recession. The Bank has not gone that far yet.

According to the Bank of Canada, “economic activity will slow as global growth moderates, and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.”

Bank of Canada Overnight Rate

Bottom Line

Today’s Bank of Canada reports confirmed that the Governing Council continues to judge that interest rates will need to rise further, and “the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation.” Once again, the Bank asserted it is “resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.”

At 2.5%, the policy rate is at the midpoint of its ‘neutral’ range. This is the level at which monetary policy is deemed to be neither expansionary nor restrictive. Governor Macklem said he expects the Bank to hike the target to 3% or slightly higher. Before today’s actions, markets had expected the yearend overnight rate at 3.5%.

Please Note: The source of this article is from SherryCooper.com/category/articles/

Canadian Inflation Surged to 7.7% In May

Canada’s consumer price index increased 7.7% in May from a year earlier, up from 6.8% in April, the fastest inflation pace since January 1983. The release confirms that the Bank of Canada is staring down the most dangerous burst of Inflation since it started targeting the consumer price index in the early 1990s.

Excluding gasoline, the CPI rose 6.3% year over year in May, after a 5.8% increase in April. Price pressures continued to be broad-based, pinching the pocketbooks of Canadians and, in some cases affecting their ability to meet day-to-day expenses.

The acceleration in May was mainly due to higher gasoline prices, which rose 12.0% compared with April 2022 (-0.7%). Higher service prices, such as hotels and restaurants, also contributed to the increase. Food prices and shelter costs remained elevated in May as price growth was unchanged year-over-year.

Monthly, the CPI rose 1.4% in May, following a 0.6% increase in April. On a seasonally adjusted monthly basis, the CPI was up 1.1%, the fastest pace since the introduction of the series in 1992.

Wage data from the Labour Force Survey found that average hourly wages rose 3.9% year over year in May, meaning that, on average, prices rose faster than wages in the previous 12 months.

Energy prices rose 34.8% on a year-over-year basis in May, driven primarily by the most significant one-month price increase since January 2003. Compared with May 2021, consumers paid 48.0% more for gasoline in May, stemming from high crude oil prices, which also resulted in higher fuel prices (+95.1%).

Crude oil prices rose in May due to supply uncertainty amid Russia’s invasion of Ukraine, as well as higher demand as travel continued to grow in response to eased COVID-19 restrictions.

Grocery prices remained elevated in May as prices for food purchased from stores rose 9.7%, matching the gain in April. With price increases across nearly all food products, Canadians reported food as the area in which they were most affected by rising prices. Supply chain disruptions and higher transportation and input costs continued to put upward pressure on prices.

In May, shelter costs rose 7.4% year over year, matching the increase in April. Year over year, homeowners’ replacement costs rose to a lesser extent in May (+11.1%) compared with April (+13.0%), as prices for new homes showed signs of cooling.

Although prices for mortgage interest costs continued to decrease on a year-over-year basis, prices fell less in May (-2.7%) compared with April (-4.4%), putting upward pressure on the headline CPI.

Bottom Line

All central banks worldwide (except Japan) face much more than expected inflation. Today’s 7.7% inflation report for May increases the urgency for the Bank of Canada to quickly withdraw stimulus from an overheating economy for fear of price pressures becoming entrenched in inflation expectations and the economy. Tapping on the brakes isn’t good enough. The Bank must expedite the return to a neutral level of interest rates, which likely means the top of the neutral range at 3% for the overnight rate. It currently stands at only 1.5%.

We expect a 75 basis point hike on July 13, bringing the policy rate up to 2.25%. Markets are currently predicting that rate to go to 3.5% by yearend. That might well be too high, but right now, the Bank needs to prove its inflation-fighting credibility, even if it drives the economy into recession. It will continue to slow the housing market, reversing some of the 50% increase in national home prices over the past three years.

According to Bloomberg News, Senior Deputy Governor Carolyn Rogers was asked today about the possibility of a ‘super-sized’ move. She said, “We’ve been clear all along the economy is in excess demand, inflation is too high, rates need to go up. We’ll get it there.” Suggesting the possibility of an even larger than 75 bp rate hike.

The 7.7% annual reading may not even represent the peak, given that gasoline prices have picked up further in June.

The full range of core inflation measures surged in May, suggesting that price pressures go well beyond food and energy. The chart above shows that the Bank of Canada has consistently underestimated inflation. So have other central banks. They are bringing out the big guns now, and the housing market will always take the biggest hit.

Canadian Labour Market Is Much Too Tight–Adds To Inflation Pressure

Today’s Labour Market Survey for May 2022 showed that hiring continued at a rapid pace last month in an increasingly tight labour market, driving the jobless rate to another record low and fueling a sharp acceleration in wage gains. The economy added 39,000 jobs in May, surpassing expectations. The unemployment rate fell to 5.1%, far below the noninflationary rate of joblessness. Job vacancies are at a record high, and wage inflation accelerated to 3.9%, from the 3.2% pace posted in April.

Another sign of a red-hot jobs market was a shift from part-time employment to full-time. Full-time employment jumped by 135,400, with part-time jobs down by 95,800.

The excess supply of jobs continues to push wages higher and will undoubtedly cause the Bank of Canada to continue to hike rates aggressively. The Governing Council of the Bank will release their next decision on July 13, as money market traders now see an even chance that the central bank will increase the overnight policy rate by 75 bps next month.

The employment rate, which measures the percentage of the population aged 15 years and older that has a job, increased to almost 62% in May, from 59.4% cent a year earlier.

Bottom Line 

In other relevant news today, the US released its CPI inflation report for May showing inflation accelerated to a whopping 8.6%, up from 8.3% in April. Investors increased bets on a 75 bp hike after the release showing inflation is at a fresh 40-year high. Both headline and core inflation rose more than expected.

Market rates shot up on today’s news, with the Canadian 5-year government bond yield now at 3.3%.

The Bank of Canada Hikes Rates Again By 50 bps.

Another Jumbo Rate Hike, Signalling More To Come

The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points once again today, marking the third rate hike this year. The two back-to-back half-point increases are without precedent, but so were the dramatic pandemic rate cuts in the spring of 2020. Indeed, with the surge in Canadian inflation to 6.8% in April, the Bank of Canada is still behind the curve. The chart below shows that inflation remains well above the Bank’s forecasts. Today’s press release suggests they now estimate that inflation rose again in May and could well accelerate further.

Today’s policy statement emphasized that “As pervasive input price pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%. Almost 70% of CPI categories now show inflation above 3%. The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.”

“The increase in global inflation is occurring as the global economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe. In the United States, private domestic demand remains robust, despite the economy contracting in the first quarter of 2022.”

The Bank said that “Canadian economic activity is strong and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with the Bank’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels. With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid”.

Bottom Line

The Bank of Canada couldn’t be more forthright. The concluding paragraph of the policy statement is as follows: “With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank’s primary monetary policy instrument, with quantitative tightening acting as a complementary tool. The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target.”

The Bank of Canada has told us we should expect at least another 50 bps rate hike when they meet again on July 13. It could even be 75 bps if inflation shows no sign of decelerating. The Bank estimates that the overnight rate’s neutral (noninflationary) level is  2%-to-3%. Traders currently expect the policy rate to end the year at roughly 3%.

This was a very hawkish policy statement. The central bank is defending its credibility and will undoubtedly continue to tighten monetary policy aggressively.

Out-Sized Jump In Bank of Canada Policy Rate.

Bank of Canada Hikes Rates by 50 BPs, Signalling More To Come 

The Governing Council of the Bank of Canada raised the overnight policy rate by a full 50 basis points for the first time in 22 years. This was a widely telegraphed action that will be followed by the US Federal Reserve next month. While the BoC was the first G-7 central bank to take such aggressive action, the Bank of New Zealand also hiked rates today by half a percentage point. Considering the surge in inflation and the strength of the Canadian economy, another jumbo rate hike may well be in the cards.

The Bank now realizes that inflation is coming, not just from supply disruptions but also from excessive demand. “In Canada, Growth is strong, and the economy is moving into excess demand. Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices.”

The Bank now says that “Growth looks to have been stronger in the first quarter than projected in January and is likely to pick up in the second quarter. Consumer spending is strengthening with the lifting of pandemic containment measures. Exports and business investment will continue to recover, supported by strong foreign demand and high commodity prices. Housing market activity, which has been exceptionally high, is expected to moderate”.

The Governing Council has, once again, revised up its inflation forecast. CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout this year. It is then expected to ease to about 2½% in the second half of 2023 and return to the 2% target in 2024. There is an increasing risk that expectations of elevated inflation could become entrenched.

With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further. The Bank is also ending reinvestment and will begin quantitative tightening (QT), effective April 25. Maturing Government of Canada bonds on the Bank’s balance sheet will no longer be replaced, and, as a result, the balance sheet size will decline over time. This will put further upward pressure on interest rates further out the yield curve.

Bottom Line

Traders are betting that the overnight rate will approach 3.0% one year from today. In today’s Monetary Policy Report (MPR), the Bank revised upward its estimate of the neutral overnight rate to a range of 2.0% to 3.0%–up 25 bps from their estimate one year ago. This is the Bank’s estimate of the overnight rate that is consistent with the noninflationary potential growth rate of the economy.

The rise in interest rates has already shown signs of slowing the Canadian housing market. The MPR states that “Resales are expected to soften somewhat in the second quarter as borrowing rates rise. Low levels of both builders’ inventories and existing homes for sale should support new construction and renovations in the near term”.

Bond yields have risen in anticipation of the Bank of Canada’s move taking the five-year fixed mortgage rate up to between 3.5% and 4%. This could be a pivotal time, as mortgage borrowers must qualify for loans at the maximum of 5.25% or 2 percentage points above the offered contract rate. We are now beyond the  2 ppts threshold, which reduces the buying power of many.

With prices rising all around (in Vernon we’re currently paying $1.839 per L) it makes you thankful you have investments in the market and own your home so you can feel any potential positive effects.  If you don’t own investments or your own home, perhaps its time!

The following is from Dominion Lending Centre’s chief economist, Dr. Sherry Cooper:

Canadian CPI Inflation Rises to 5.7%.

Inflation Pressures Accelerating

StatsCanada today reported that consumer prices rose 5.7% year-over-year in February, up again from the prior month’s 5.1% rise. This was the largest gain since August 1991 (+6.0%).

This was no surprise, as the Ukraine War has stepped up inflation pressure worldwide. The US CPI rose a whopping 7.9% last month (see chart below). Price increases were broad-based in February, pinching the pocketbooks of Canadians. Consumers paid higher prices for gasoline and groceries in February 2022 compared with the same month a year earlier. Shelter costs continued to trend higher, rising at the fastest year-over-year pace since August 1983.

Excluding gasoline, the Consumer Price Index (CPI) rose 4.7% year over year in February, surpassing the gain in January (+4.3%) when the index increased at the fastest pace since its introduction in 1999.

On a monthly basis, the CPI rose 1.0% in February, the most significant increase since February 2013, following a 0.9% increase in January. On a seasonally adjusted monthly basis, the CPI rose 0.6%.

Gasoline Prices Surge Amid Geopolitical Conflict

Canadian motorists paid 32.3% more at the pump compared with February 2021.

Monthly gasoline prices increased 6.9% amid geopolitical conflict in Eastern Europe and the Middle East, as uncertainty surrounding the global oil supply put upward pressure on prices.

Similarly, prices for fuel oil and other fuels increased 8.5% month-over-month following higher international energy prices.

Grocery Prices Shot Up Again

Prices for food purchased from stores (+7.4%) rose faster in February than in January (+6.5%). This is the most significant yearly increase since May 2009. Higher input prices and heightened transportation costs continued to contribute to inflationary pressure in February.

Price growth for meat (+11.7%), including fresh or frozen beef (+16.8%) and chicken (+10.4%), was higher year over year in February than in January (+10.1%).

Shelter Costs Rise At Fastest Pace Since 1983

In February, shelter costs rose 6.6% year over year, the fastest pace since August 1983. Higher costs for both owned accommodation (+6.2%) and rented accommodation (+4.2%) increased.

Homeowners’ replacement cost (+13.2%), which is related to the price of new homes, and other owned accommodation expenses (+14.3%), which includes commissions on the sale of real estate, remained elevated year over year. In contrast, mortgage interest cost (-6.0%) moderated the shelter index on a year-over-year basis.

According to the Canadian Mortgage and Housing Corporation, improved economic and demographic conditions over the past year, including youth employment recovery and resumption of international migration to Canada, supported rental demand. This, in part, contributed to higher rent (+4.2%) prices year over year in February.

Bottom Line

Inflation has exceeded the Bank of Canada’s 1%-to-3% target band for 11 consecutive months. Other central banks have already begun to hike overnight rates from their effective lower bound introduced in March 2020.

Today, the U.S. Federal Reserve hiked the overnight policy target for the first time since 2018 by 25 basis points and signalled that it expects to hike rates six times more this year.

The global geopolitical tensions and rising risk of a drawn-out conflict exacerbate inflation and supply bottlenecks, delaying a return to sub-3% inflation.