MNI POLICY: Inflation Surprise Won't Prompt End To BOC Pause

By Yali N'Diaye

     OTTAWA (MNI) - Canadian inflation data Friday surprised on the upside, but

the unexpected acceleration won't interrupt the Bank of Canada's current

wait-and-see stance on interest rates.

     Headline inflation was -0.1% in December, Statistics Canada reported

Friday, compared to an estimate of a 0.4% monthly decline in an MNI survey. On a

year-on-year basis, inflation accelerated to 2.0% from 1.7% in November, while

analysts had expected it to hold steady at 1.7%.

     However, the BOC will be unlikely to take this 0.3-percentage point jump in

the 12-month inflation rate, bringing it to its 2.0% mid-range target, as a

signal to hurry an end to its current pause.

     The surprise was driven by a jump in services prices, which shot 3.5%

higher from December 2017, for the largest 12-month gain since August 2008.

Airfare prices soared 21.7% on the month and 28.1% year-over-year. But air

transportation was subject to methodological changes in March 2018, and could

continue to create surprises, likely leading the BOC to look through them for a

few months.

     The BOC, which revised down its growth and inflation outlooks in January

mainly owing to lower oil prices, expects headline inflation to slip to 1.7% in

the first quarter, before it climbs back to 2.0% by the end of this year.

     Excluding gasoline, overall CPI was up 0.2% on the month and 2.5%

year-over-year, the largest 12-month gain since October 2014. Gasoline continued

its downward trajectory with a monthly 6.5% drop and a year-over-year 8.6%

decrease.

     Different measures of underlying inflation remained unchanged in December,

and close to the 2.0% annual target. CPI-common rose 1.9%, CPI-median 1.8%, and

CPI-trim 1.9%.

     Given this underlying price stability, the central bank will be in no hurry

to raise rates and risk further slowing economic growth, especially after the

latest housing data showing the sector struggling with higher interest rates and

tighter underwriting standards.

     While the BOC continues to see the need for its key policy rate, left

unchanged at 1.75% on Jan. 9, to rise to a neutral range of 2.5% to 3.5% "over

time," it says the pace of tightening will be data dependent, "with a particular

focus on developments in oil markets, the Canadian housing market, and global

trade policy."

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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