Canada’s inflation rate unexpectedly holds steady, market trims rate cut bets

By Ismail Shakil

OTTAWA (Reuters) -Canada’s annual inflation rate unexpectedly remained at 3.1% in November, data showed on Tuesday, prompting market players to trim their bets as to when the Bank of Canada would start cutting interest rates.

Analysts polled by Reuters had forecast inflation would ease to 2.9% from 3.1% in October. Statistics Canada said accelerating prices of travel tours had offset slower growth in food prices and cheaper cellular services and fuel oil.

Money markets trimmed their expectations for monetary policy easing, with the chances of a cut next month dipping to 16.0% from 21.4%. Markets still expect the central bank to begin easing as soon as April.

“(The November release) suggests those rate cuts are still a little bit of a ways off and the market might be getting ahead of itself a little bit,” said Michael Greenberg, senior vice president and portfolio manager at Franklin Templeton Investment Solutions.

The data helped push the Canadian dollar up 0.3% to C$1.3351 to the greenback, or 74.90 U.S. cents, from C$1.3376, or 74.74 U.S. cents.

On a month-over-month basis, the consumer price index was up 0.1%, compared with a forecast for a 0.1% decline.

CPI-median and CPI-trim, two of the BoC’s three core measures of underlying inflation, also held steady at 3.4% and 3.5%, respectively.

The Bank of Canada could start cutting interest rates next year as long as core inflation comes down as predicted, BNN Television cited Bank of Canada Governor Tiff Macklem as saying in an interview that aired on Monday.

A nearly 30% increase in mortgage interest costs and a 7.4% rise in rent were two of the largest contributors to the annual inflation rate, Statscan said.

Macklem last week said persistently high increases in the price of shelter were a major reason for the overall inflation rate remaining sticky.

The central bank has left its key interest rate at a 22-year high of 5% in its last three policy meetings and has maintained that it is too soon to talk about rate cuts. The central bank’s next rate announcement is on Jan. 24.

“Today’s report represents less progress in taming inflation than we had expected … bond yields are rising as some of the most aggressive bets on rate cuts are getting pared back,” said Royce Mendes, head of macro strategy at Desjardins.

“We are retaining our forecast that the Bank of Canada has enough evidence in hand to begin trimming rates in April 2024.”

Prices for food purchased from stores increased 4.7% in November, a slowdown from the 5.4% recorded in October, while energy prices fell 5.7% compared with a 5.4% decline in the prior month, Statscan said.

Excluding volatile food and energy, prices rose 3.5% compared with a 3.4% year-over-year rise in October.

(Additional reporting by David Ljunggren and Dale Smith in Ottawa, Fergal Smith in Toronto; Editing by Paul Simao and Emelia Sithole-Matarise)