Morning Market Brief
January data showed more signs that inflationary pressures are softening in Canada. This could help put the Bank of Canada (BoC) on a path to begin lowering interest rates after expressing its desire to see more clear signs inflation will eventually fall to its 2% target. Inflation started coming down in earnest in 2022 after moving to decades-high levels amid the pandemic in response to supply chain disruptions and rising demand. The BoC raised interest rates aggressively, which appear to have taken hold.
- Canada’s annual inflation rate was 2.9% in January. This was a slowdown from the 3.4% rate in December, and below the 3.3% rate estimated by economists, based on a Bloomberg survey. January’s rate was the slowest in Canada since June 2023.
- Gasoline prices dropped considerably on a year-over-year basis, contributing to January’s declining rate. The growth in food prices slowed again in January, which might help ease the pressure on many Canadian households in terms of grocery costs.
- Despite January’s decline, inflation remains relatively elevated and above the BoC’s 2% target. Mortgage costs are a main contributor to Canada’s high inflation rate. Amid the BoC’s aggressive interest-rate hikes, mortgage rates rose substantially. Canadians have been faced with high mortgage costs relative to pre-pandemic levels.
- January’s falling rate is a positive development for Canada’s economy. Before starting to lower rates, the BoC wanted to see more evidence inflation will indeed move back to its 2% target. This likely puts it on track to meeting that goal, which could result in the BoC cutting interest rates at some point this year.
The headline inflation figure was welcome news for market participants, who are mostly hoping the BoC will begin lowering interest rates. While inflation is coming down, there is still much work to be done by the BoC. In the meantime, financial markets could be shaky as each economic release is carefully studied to try to predict when the BoC will start.
Please contact me to discuss how Canada’s inflation rate might impact your portfolio.