Instant view: Canada annual inflation rate slows to 5.2% in February

TORONTO (Reuters) – Canada’s annual inflation rate fell to 5.2% in February, largely on the base year effect, as higher mortgage interest offset lower energy prices, Statistics Canada said on Tuesday.

Analysts polled by Reuters had expected the annual rate to fall to 5.4% in February from January.

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Market reaction: CAD/

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COMMENTARY

MICHAEL GREENBERG, SVP AND PORTFOLIO MANAGER, FRANKLIN TEMPLETON INVESTMENT SOLUTIONS

“I think the Bank of Canada will be a little bit happy to see some of those core measures that they like to look at, come down off their highs from the middle or late last year. So that that’s good news, still elevated from an absolute sense, but in the right direction.”

“Our view is probably that with this banking stress that we’re seeing now, which obviously is not in the data yet, we should eventually see inflation continue to cool back down. The banking stresses probably crimps lending and all else equal economic growth a little bit.”

“That should probably keep the Bank of Canada on hold at the next meeting, assuming that the banking system continues to calm, but inflation is still quite elevated and a major concern.”

ANDREW KELVIN, CHIEF CANADA STRATEGIST AT TD SECURITIES

“I think the Bank (of Canada) is probably happy to see it. It’s in-line with the market’s expectation very broadly. It’s a very modest downside surprise. You get the broader trends here. You look at core inflation that is decelerating by about two-tenths year-over-year on average. And I think importantly, this also brings headline inflation tracking for Q1 below the BOCs forecast from January. So it just makes it easier for them to maintain their hold. Ultimately, there is more work that needs to be done if the BOC is going to stay at 4.5%. But it is certainly a step on the path towards the 2% inflation that the BOC has in their forecast. So they’ll welcome this.”

“I will say it’s all a little bit secondary given some of the volatility in the financial sector. But in an environment where policymakers are able to ring-fence some of the financial contagion, and we go back to an environment where we’re just looking at the fundamentals, this sort of CPI print is consistent with the BOC staying at 4.5% for all of 2023.”

JAY ZHAO-MURRAY, MARKET ANALYST AT MONEX CANADA

“While the Bank of Canada’s last rate statement was mildly hawkish, following the latest global banking troubles and this February inflation undershoot, the odds of another hike this cycle have dropped sharply. While the market seems a bit overzealous in pricing two cuts by year-end, we agree that the balance now tilts dovish. The instant USD-CAD rally off the back of the data reflects this, although it’s pulled back from the highs.”

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