Retail Drop, Subdued Inflation Put Bank of Canada Rates on Hold

Updated on
  • August retail sales fall 0.3%, versus 0.5% gain forecast
  • Outside of gasoline, few signs of inflationary pressures

An unexpected decline in retail sales and scant evidence of inflation pressure will give the Bank of Canada little reason to press ahead with a third-straight rate increase next week.

Statistics Canada reported Friday retail sales declined 0.3 percent in August, versus a median forecast of a 0.5 percent gain. They also showed that excluding a jump in gasoline, inflation was little changed in September.

The two indicators are the last of any significance before the Bank of Canada’s Oct. 25 rate decision, and suggest no urgency for Governor Stephen Poloz to increase borrowing costs again after two hikes since July. The Canadian dollar fell 0.6 percent to C$1.2558 after the report. Odds of a rate increase next week fell to about 19 percent, from 21 percent yesterday, swaps trading suggests.

“A very slow turn in prices, and what looks like another ho-hum month for GDP augurs for a dovish take on the Bank of Canada on Wednesday next week,” Nick Exarhos, an economist at CIBC Economics, said in a note to investors.

The retail sales number was the big disappointment, and reinforces expectations the nation’s economy is heading for a slowdown after strong growth earlier this year. Monthly retail sales are little changed since touching a 2017 high in May. In volume terms, sales fell 0.7 percent in August, the biggest decline since March 2016.

Motor vehicle sales were one sector of strength, and the total number also got a boost from higher gasoline prices. But excluding those two sectors, sales were down 1.3 percent.

Canadian consumer price inflation in September jumped to its highest level since April on gasoline prices, but the gain was less than expected.

Annual inflation accelerated to 1.6 percent on the higher gas prices, versus economist expectations for 1.7 percent. Excluding gas, the annual inflation rate was unchanged at 1.1 percent. The average of the Bank of Canada’s three key core inflation measures was 1.6 percent, versus 1.57 percent in August. The core rate is the highest since January

While the inflation rate remains below the central bank’s target, the Bank of Canada has justified this year’s rate hikes by citing quickly vanishing excess capacity in the economy and by claiming the forces keeping inflation subdued are temporary.

Outside of gasoline however, the report showed inflation pressures remain muted in most sectors.

— With assistance by Erik Hertzberg, and Greg Quinn

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