Bank of Canada Seeks Downward Trend in Inflation

By Paul Vieira

OTTAWA--Higher interest rates have been effective in cooling economic activity and alleviating upward price pressures, but the Bank of Canada is awaiting more evidence of a sustainable downward trend in inflation, according to a senior central bank official.

Deputy governor Toni Gravelle stated in prepared remarks that Canada's economy is currently in a state of equilibrium, with data indicating lackluster growth, rising unemployment, and decelerating inflation. In October, total inflation slowed to 3.1%, while short-term annualized core inflation, which excludes volatile items such as food and energy, decreased to approximately 3%. The central bank's target range for inflation is set at 1% to 3%, with a goal of maintaining 2% as the midpoint.

"While we observed encouraging improvements in inflation measures in October, it is crucial to remember that it was only for one month. We need to observe further progress," stated Gravelle during the scheduled delivery of his remarks in Windsor, Ontario.

Gravelle further emphasized that services inflation, excluding shelter costs, has declined from 4% earlier in the year to 2.3% in October. However, he noted that there is still work to be done in achieving price stability.

These statements offer additional insight into the Bank of Canada's decision on Wednesday to maintain its policy rate at 5%. The accompanying statement issued by the central bank expressed ongoing concerns about upward risks to the inflation outlook and reaffirmed the readiness to implement further rate increases if necessary. Gravelle echoed this sentiment by stating, "Given the risks associated with the inflation outlook, we remain prepared to raise the policy rate further, if required."

Economists at BMO Capital Markets anticipated that Gravelle's remarks would adopt a "mildly hawkish" tone. They suggested that the central bank's cautious approach in its Wednesday statement, which moderated the language on forward-looking guidance, indicates a gradual preparation for potential interest rate cuts in the later part of 2024, coinciding with projected weakening of output.