June inflation data gave the Bank of Canada what it needed in order to cut interest rates at next week’s meeting. The Bank of Canada is scheduled to meet on July 24th, and economists are becoming increasingly certain of the possibility of lowering interest rates. This is reflected in interest rate derivatives which now show a 93% probability of a rate cut.
The CPI slowed to 2.7% from 2.9% with core numbers also slowing. The figures show that the previous month’s upward surprise in inflation was just a blip in a broader trend of lower inflation as demand in the economy remains under pressure, according to CIBC. According to Catherine Judge, an economist at CIBC, the latest CPI data gave the Bank of Canada what it needs in order to cut interest rates at next week’s meeting. Judge explained that positive core inflation data indicate that the economy is moving towards a broader deflationary trend as pressure on demand continues.
The chief economist added that the latest data increased the likelihood of successive interest rate cuts but noted that the report overall was a “mix of outcomes.” He explained that the annual three-month pace of core inflation has risen for three consecutive months, with prices for “soft” goods such as dining out, health care and household operations rising. This means the annual inflation rate should remain at the upper end of the Bank of Canada’s 1% to 3% range over the coming months, Orlando said. Statistics Canada reported that the CPI deceleration was mainly due to slower year-on-year growth in gasoline prices (up 0.4%), as well as lower prices for durable goods (down 1.8%), with the cost of used cars falling by 4.5%. However, store-bought food prices rose 2.1% in June.
Decreased consumer price index
On a monthly basis, the CPI fell by 0.1% in June, while the seasonally adjusted CPI rose by 0.1%. June’s CPI numbers follow May’s figures, which unexpectedly jumped to 2.9% from 2.7% in April, driven by increases in prices for mobile phone services, tours, rent and air transport. Analysts had been expecting a more moderate figure of 2.6% for May, and the higher number has led some to speculate that a Bank of Canada rate cut in July may be less likely.
Economists pointed to significant deflationary winds coming through the housing sector, as rental growth slowed to +0.4% m/m and fell slightly to 8.8% y/y. “With population growth slowing due to government restrictions on mortgage rates, and more people moving into the homeownership market as interest rates fall, the rental slowdown is expected to continue,” CIBC economists wrote. “The gradual increase in rents means that sheltering will begin to add material downward pressure on inflation.”
They added: “On the surface, the demand-driven part of inflation appears to be fading with only a few pockets keeping inflation above target. In our view, the Bank of Canada can gradually relax away from its meeting-by-meeting and data-driven strategy.” And working on something close to automation by trusting that his forecasts have been more accurate over the past year it is clear that the economy needs to ease interest rates to ensure a soft landing with future headwinds such as large mortgage renewals and population growth that may meet its needs. “With headline inflation back in target territory and a Bank of Canada survey showing corporate inflation expectations heading lower, any concerns about the risks of inflation rising or inflation remaining above target are not in our favour.”
Possibility of lowering interest rates
Analysts polled before the announcement had expected the CPI to fall to 2.8% from 2.9% in May, and core inflation measures that the Bank of Canada is under the microscope improved slightly, with both the average CPI and the discounted CPI rising from May by 0.2% seasonally adjusted, down from 0.3%.
The positive core inflation data set shows “that the upward surprise in inflation the previous month was just a blip in a broader trend toward deflation as demand in the economy remains under pressure,” Judge wrote. Financial market expectations for an interest rate cut in the central bank’s announcement of interest rates on July 24th rose on Tuesday from 82% before the data was published to 88%, and Benjamin Ritz, a strategist in interest rates and macroeconomics, said that the Bank of Montreal, which expected Previously, the next interest rate cut by the Bank of Canada in September is now expected to happen next week.
The chief economist also wrote that the latest data “increased the likelihood of successive interest rate cuts.” But he declared the report overall a “mix of findings,” noting that the annual three-month pace of core inflation has risen for three straight months, with prices for “soft” goods such as dining out, health care and household operations rising. “This means that the annual inflation rate should remain at the upper end of the Bank of Canada’s 1% to 3% range over the coming months,” he added. “The acceleration of fundamental rate pressures that lie below the headline numbers” provides an argument for waiting until September to cut interest rates, Carl Schamotta, chief market strategist at Corpay, wrote in a note. However, he added: “The economy remains weak, inflation expectations have fallen significantly, and bank officials appear to be operating with bias
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