Softer Inflation a Red Light for Poloz After U.S. Rate Hike

  • Rate slows to 1.2% in November as Bank of Canada, Fed diverge
  • Better-than-expected retail sales soften economic blow

Stephen Poloz, governor of the Bank of Canada

Photographer: David Kawai/Bloomberg

Canada’s economy is ending the year with a whimper.

Inflation slowed to a 1.2 percent pace in November from a year earlier, Statistics Canada reported Thursday, a softer reading than economists forecast. One measure of core inflation slowed to the lowest level since 1996.

The readings reflect the divergence between Canada and developed peers including the U.S., where a flurry of data Thursday bolstered optimism in the American economy and pushed the dollar and bond yields higher. North of the border, the drop in commodity prices that began in mid-2014 is still curtailing business investment, and exports have failed to pick up the slack even as the Canadian exchange rate depreciated.

“The Canadian economy has gone backward over the last two years as other economies move forward,” Eric Lascelles, chief economist at RBC Global Asset Management in Toronto, which oversees about $370 billion in assets, said by telephone. “Maybe it’s starting to become more evident.”

Erik Hertzberg/Bloomberg

Gasoline prices fell 1.7 percent in November on the year, reversing the prior month’s gain of 2.5 percent. Food costs declined 0.7 percent, matching a prior drop that was the first since January 2000. Jewelry prices fell 3 percent, the most in two decades.

The average of three new core inflation measures was 1.6 percent on the year, down from a prior reading of 1.8 percent, another sign of underlying malaise. The “common” measure slowed to 1.3 percent, a two-decade low, a development that will “certainly fuel a dovish tone” by the central bank when it releases its next monetary policy report in January, Matthieu Arseneau of National Bank Financial, wrote in a note to clients.

On the brighter side, the country’s retail sales jumped 1.1 percent in October, the statistics agency reported. That was the third straight gain, and almost quadruple the 0.3 percent median forecast in a Bloomberg survey. That may be reflected in Friday’s monthly gross domestic product report, currently forecast to show zero growth.

Rate Outlook

The sales data may be evidence Canadians are spending their higher government child benefits, Derek Holt, head of capital market economics at Scotiabank in Toronto, wrote in a research report. He said the evidence is preliminary on what may be a transitory gain, but should be treated as an “encouraging signal.”

Still, inflation will be the more significant measure for the Bank of Canada, and will bolster the view it is is on hold for the foreseeable future, according to Doug Porter, chief economist in Bank of Montreal.

Governor Stephen Poloz held the central bank’s benchmark interest rate at 0.5 percent in December, after saying in October he came close to cutting. The U.S. Federal Reserve, meanwhile, lifted rates this month, with further increases expected in 2017 as growth picks up.

Thursday’s report is “just a further justification for the Bank of Canada to stay put,” even if or as the Fed continues to tighten interest rates in 2017, Porter said in a note to clients.

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