Canada’s Inflation Eases, Paving Way for Possible Bank of Canada Rate Cut

Canada’s annual inflation rate unexpectedly dropped to 2.7% in June, as revealed by Statistics Canada on Tuesday. This development heightens the probability of another Bank of Canada (BoC) interest rate reduction on July 24.

“The Bank of Canada got the green light to cut interest rates at next week’s meeting,” stated CIBC economist Katherine Judge in a note on Tuesday morning.

Prior to the announcement, Reuters polled analysts who predicted a reduction in the Consumer Price Index (CPI) to 2.8% from May’s 2.9%. Core inflation indicators, which are closely monitored by the BoC, also showed slight improvement. Both the CPI-median and CPI-trim rose by a seasonally adjusted 0.2% from May, down from 0.3%.

This range of positive core inflation data indicates that “the prior month’s upside surprise in inflation was just a blip in a broader trend of disinflation as demand in the economy remains under pressure,” added Judge.

Following the data release, money markets raised the likelihood of a rate cut during the BoC’s July 24 announcement from 82% to 88%, as per Reuters. The Bank of Montreal, initially forecasting a September rate cut, now anticipates the cut next week, according to rates and macro strategist Benjamin Reitzes.

TD Bank senior economist James Orlando echoed this sentiment, noting that the latest data “has increased odds of back-to-back rate cuts.” However, he characterized the report as “a mixed bag,” highlighting that core inflation’s three-month annualized pace has increased for three consecutive months, with rising prices in areas such as dining out, healthcare, and household operations.

Orlando explained, “This infers that the annual pace of inflation should remain in the upper end of the BoC’s 1% to 3% range over the coming months.”

Karl Schamotta, Corpay’s chief market strategist, pointed out that the “acceleration in underlying price pressures found below the headline numbers” suggests a potential delay in rate cuts until September. Nonetheless, he acknowledged, “the economy remains weak, inflation expectations have fallen dramatically, and Bank officials appear to be operating with a dovish bias.”

Statistics Canada noted that the slowdown in the CPI was primarily due to slower year-over-year growth in gasoline prices, which were up 0.4%, and a 1.8% drop in durable goods prices, including a 4.5% decrease in used car costs. However, food prices rose by 2.1% in June.

On a monthly basis, the CPI decreased by 0.1% in June, while the seasonally adjusted CPI saw a slight increase of 0.1%.

The June CPI figures follow an unexpected rise in May to 2.9% from April’s 2.7%, driven mainly by higher costs for cellular services, travel tours, rent, and air transportation. Analysts had predicted a milder 2.6% figure for May, with the higher result initially casting doubt on the likelihood of a July rate cut by the BoC.