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ING: Cooling Canadian CPI, Banking Crisis, Raise Bets BoC Done Hiking This Cycle

Published 2023-03-21, 04:56 p/m
© Reuters.

By Ketki Saxena 

Investing.com – After Canadian inflation slowed more rapidly than expected in February, analysts from ING are now expecting that the Bank of Canada’s next move on the policy rate “will be downwards and that the first cut is likely to come before the end of the year.” 

Statistics Canada announced earlier today that headline inflation in Canada rose 0.4% MoM, below the 0.5% expected, resulting in the annual rate of consumer price inflation falling sharply to 5.2% from 5.9%. 

The cooling CPI reinforces the Bank of Canada’s stance that it is now on a “conditional” pause. 

Following today’s data release, James Knightley, Chief International economist at ING noted that “This guidance [for a conditional pause] is likely to remain in place at the next BoC meeting on April 12, with the BoC likely to sound even more cautious in the wake of US and European banking woes.”

Knightley believes the Bank of Canada is more likely to err on the side of caution and avoid over tightening policy at a highly sensitive time with“global banking woes adding  to downside growth risks”. 

Knightly writes that while “Canadian banks are looking relatively resilient right now, but they too are likely to become increasingly wary given the fallout from what has happened. We should expect to see some modest tightening of lending standards which means access to credit will become more restricted throughout the economy.”

Knightley further cited Canada’s highly rate-sensitive economy, high levels of household debt, and the economy’s dependence on real estate as key reasons they think the Bank of Canada will begin to cut rates. 

He noted, “Canada’s greater exposure to interest rate rate hikes via a high prevalence of variable rate borrowing means consumer activity should slow through 2023. High household debt levels in Canada - equivalent to more than 180% of disposable income versus 103% in the US – mean that Canada is especially exposed to the risk of a housing market correction in a rising interest rate environment.”

Knightley also cited“ the upcoming budget, expected to exercise fiscal restraint”, as a reason why the Bank of Canada “next move in rates should be downward, with a rate cut possible before the end of the year.”

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