New Inflation Data Suggests the Bank of Canada Doesn’t Need to Worry About Raising Interest Rates Anytime Soon

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Bank of Canada Reassured by Low Inflation Expectations

The Bank of Canada has reason to be reassured about low inflation expectations, according to recent data. The central bank’s quarterly Business Outlook Survey found that companies are feeling good about their prospects, with nearly 60% of respondents saying they intend to increase investment over the next 12 months.

However, a small majority of respondents (51%) said they expected input and output costs to rise over the next 12 months, an increase from the previous quarter. Nevertheless, this does not suggest a more persistent increase in inflation is coming yet.

The central bank’s leaders have been guided by consumer expectations for inflation to be about two percent in a year and around three percent in two years. According to Bank of Montreal economist Benjamin Reitzes, "while inflation pressures have perked up a bit, there’s nothing to suggest that a more persistent increase is coming… yet."

The adjusted Consumer Price Index (CPI) measure, which puts greater weight on items bought during lockdowns, such as groceries and bigger houses in the suburbs, suggests inflation has indeed been running hotter than the official figure. However, it remains within the central bank’s comfort zone.

The Bank of Canada’s next interest-rate decision is scheduled for April 21. While some analysts believe the central bank might taper its weekly purchases of Government of Canada bonds, there are no indications that a rate hike is imminent.

In summary, low inflation expectations and favorable business sentiment suggest that the Bank of Canada does not need to worry about raising rates anytime soon.

Key Points:

• The Bank of Canada’s quarterly Business Outlook Survey found companies feeling good about their prospects.
• A small majority of respondents expect input and output costs to rise over the next 12 months, but this does not suggest a more persistent increase in inflation is coming yet.
• Consumer expectations for inflation are around two percent in a year and three percent in two years.
• The adjusted CPI measure suggests inflation has been running hotter than the official figure, but remains within the central bank’s comfort zone.
• The Bank of Canada’s next interest-rate decision is scheduled for April 21.