Inflation opens door to rate cut
Lower-than-expected consumer prices in October gives central bank
opportunity to chop lending rate
Nov 21, 2007 04:30 AM
MADHAVI ACHARYA-TOM YEW
BUSINESS REPORTER
The latest inflation report from Statistics Canada, which shows that consumer prices fell slightly last
month, may give the Bank of Canada the space it needs to consider cutting interest rates, economists say.
Inflation fell slightly to an annual rate of 2.4 per cent in October, down from 2.5 per cent in September.
That's in spite of rising gasoline and housing prices, according to the report, released yesterday.
Economists were expecting prices to rise by 2.8 per cent. The core consumer price index, a key measure
for the inflation-fighters at the central bank, rose by 1.8 per cent between October 2006 and October
2007. Again, that was lower than the 2 per cent observers were anticipating. That's also down from 2 per
cent in September, and the weakest growth in the price index since June 2006.
"It suggests that we are starting to see somewhat lower inflation rates," said Dawn Desjardins, senior
economist at the Royal Bank of Canada. "That's happening a little sooner than the Bank of Canada
expected in its latest monetary police report."
A growing chorus of manufacturers and politicians is clamouring for a cut in interest rates to take some of
the steam out of the soaring Canadian dollar. The central bank is concerned that doing so would send the
Canadian economy, particularly in the prosperous West, into overdrive and thereby fuel inflation.
But these inflation numbers give the bank room to manoeuvre, economists say. "The data are likely to
continue improving as the effects of the stronger dollar are passed along to consumers, which would
appear to open the door to lower rates in the very near term," Scotia Capital currency strategists Camilla
Sutton and Stephen Malyon said in a report yesterday.
Experts at both Scotia Capital and the Royal Bank believe that the central bank will leave rates unchanged
on Dec. 4, then cut interest rates early in 2008. The upbeat inflation report sent stock markets on an
early-morning rally, though the gains eroded over the trading day. The S&P/TSX composite index closed
at 13,459.77 points, up 111.53 points.
In New York, the Dow Jones industrial average gave up triple-digit gains to finish at 13,010.14, up 51.7
points. The Canadian dollar closed at $1.0197 (U.S.), up 0.42 of cent. The dollar hit parity in September
for the first time in 30 years. It has since climbed as high as $1.10 (U.S.), but has recently pulled back.
"That does take any real sense of urgency away from the Bank of Canada having to take action,"
Desjardins said, referring to the dollar's backtrack from its recent peak.
The inflation report found that gasoline prices drove inflation last month. "In October 2007, the price at
the pump rose 13.5 per cent, compared with the same month in 2006, a change due largely to a drop in
last year's gasoline prices," Statistics Canada noted. Mortgage interest costs were up 6.7 per cent in
October from a year earlier compared with 6.4 per cent in September. The government found that the
increase is more a reflection of increases in amounts borrowed because of higher new housing prices
rather than increases due to higher interest rates.
On the flip side, buying and leasing a car cost less. The 2.4 per cent price decrease was the main factor in
the index's decline. Prices for fresh vegetables were down 14.6 per cent in October – the steepest drop
since June 1996. The decline also follows a 9.2 per cent drop in September. Inflation levels varied across
Canada. In the Prairies, prices rose by 5 per cent on an annualized basis, including the hot Alberta
economy. Inflation was up 3.6 per cent in Saskatchewan. Some Atlantic provinces also saw higher-thanaverage inflation, particularly New Brunswick, where prices rose 3.3 per cent. The rate for Ontario was 2.3
per cent.