While headline inflation is “easing relatively fast,” over the next few months it’ll become more about just how sticky inflation proves to be and how far it will drop below three per cent, according to a former Bank of Canada economist.
Charles St-Arnaud, chief economist at Alberta Central and a former economist at the Bank of Canada, said this decision was in-line with economists’ expectations but “the risks are probably still tilted to another hike if inflation doesn’t moderate the way they want to see.”
He added this could be a difficult environment for the Bank of Canada to navigate, with growth and inflation stronger than expected in the U.S. and Europe, a rebound in China creating upside risk on commodity prices, and elevated wage growth. “The Bank of Canada would want to see it [inflation] below three per cent to start to feel a bit better, so I think they're seeing encouraging changes in the right direction but I think the worry is maybe core [inflation] will be stickier over the next few months.”The former Bank of Canada economist flagged that the tightness in the labour market could start to become a real issue for the Canadian central bank due to strong wage increases.
In February, Bank of Canada Governor Tiff Macklem said wage growth in the range of four and five per cent will not help get inflation back to the two per cent target, unless productivity growth is strong.
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