Bank of Canada sidelined

Regardless of where the Federal Reserve goes next, the case for the Bank of Canada to raise rates again any time soon has just about disappeared.  Data released this morning by Statistics Canada reveal that the year-on-year increase in headline CPI eased to 1.7 percent in November from 2.4 percent in October. The November figure was the smallest annual increase since January of this year.

The sharp slowing in inflation mainly reflects a reversal in energy prices, which had been largely responsible for headline CPI moving above the Bank's 2 percent target around the middle of the year.  Gasoline prices now stand 5.4 percent lower than in November 2017.  Anecdotally, it seems very likely that further falls in gasoline prices -- the retail price of a litre of regular grade is now below $1 in my neck of the woods -- will push the headline figure lower still when the December data are reported.

All eight principal sub-components of the index remain in positive territory year-on-year.  However, all three of the Bank's preferred core measures are now back below the 2 percent target, with all of them standing at 1.9 percent.

With CPI comfortably in check and wage gains slowing markedly in spite of the tightness of the labour market, the case for the Bank of Canada to raise its target rate any further in the first quarter of 2019 now seems very weak indeed.  Of course, the persistence of historically low rates will still leave the Bank fretting over the continuing willingness of Canadian households to take on debt.  Even there, however, the Bank may be about to catch a break, with most forecasters looking for the housing market across the country to turn in a weak performance in 2019.

It's remarkable to contemplate the possibility that a policy interest rate of 1.75 percent might mark the peak of this tightening cycle.  With increasing doubts surrounding the global growth outlook, however, that may well turn out to be the case.