Chip Somodevilla
There is a chance the release today of Canada's inflation rate could lead to some hue and cry, but the timing of the data is expected to make things look worse than they actually are.
The core inflation rate in January on a year-over-year basis, which excludes the eight most volatile components, is forecast at 1.9 per cent, compared with 1.5 per cent in December, according to a survey of economists by Bloomberg.
What are the expectations? The apparent sharp pickup in the inflation can be blamed on a sharp drop in prices in January, 2009, said Benjamin Reitzes, an economist with BMO Nesbitt Burns Inc. "Indeed, inflation will likely slow over the next two months, as spare capacity keeps a lid on price pressures and hefty increases in prices in early 2009 fall out of the calculation," lowering the overall inflation rate.
BMO Nesbitt Burns does not expect the Bank of Canada will begin raising interest rates until July. Removing the high rates of inflation in February and March, 2009, as prices rose will reduce the annual inflation rate and lessen pressure on the central bank to raise rates, Mr. Reitzes said.
How will the market react? However, today's data could serve as a wakeup call for some investors in the currency and bond markets.
The approach of the core inflation rate close to the Bank of Canada's 2-per-cent target, "could remind markets of the risk that an inflation-targeting Bank of Canada could move ahead of the [U.S. Federal Reserve Board]" said Avery Shenfeld, chief economist with CIBC World Markets Inc. in a report to clients. "We're looking for a move through parity by autumn if the Bank of Canada hikes rates ahead of the Fed."
The Canadian dollar closed yesterday at 95.68 cents (U.S.).
For bond investors, the yield on Canadian bonds is likely to drift higher as prices decline, said Eric Lascelles, chief economics and rate strategist for TD Securities Inc. That view "relates simply to the eventuality" that the Bank of Canada will raise the target overnight bank rate and also the likelihood of healthier economic growth in Canada, he said.
TD Securities forecasts the first rate hike will not be made until the fourth quarter of 2010.
Once the central bank begins to raise interest rates, strategists expects it will be followed by a regular series of hikes as it moves away from the low emergency rate of one-quarter of a percentage point instituted at the height of the credit crisis.