Canada’s headline inflation rate eased more than expected in June, raising the odds of a Bank of Canada rate cut next week, experts say.
The Consumer Price Index (CPI) slowed to an annualized rate of 2.7% last month, according to Statistics Canada. Economists were instead expecting no change from the 2.9% reading posted in May.
Today’s result reverses the larger-than-expected rise in inflation in May, when it surged to 2.9% from 2.7% in April.
The Bank of Canada’s preferred measures of core inflation remained largely stable in June, with CPI-median easing to 2.6% (from 2.7% in May) and CPI-trim holding steady at an annualized rate of 2.9%.
Even though the three-month annualized pace of core inflation has now been rising for three straight months, most economists say the trend is now clear, giving the Bank of Canada the green light to deliver its next quarter-point rate cut on July 24.
That would bring the Bank’s overnight target rate down to 4.50%, and reduce borrowing costs for existing variable-rate mortgage holders for the second time following the Bank of Canada’s June rate cut.
The easing inflation rate signals that consumers are “becoming increasingly cautious with discretionary spending,” says BMO’s Benjamin Reitzes, pointing to particular softness in recreation and clothing spending.
Considering Canada’s rising jobless rate and growing pessimism among Canadian businesses and consumers, Reitzes anticipates that the Bank of Canada will feel confident that inflation will continue to slow, leading to a rate cut this month.
Randall Bartlett, senior director of Canadian Economics at Desjardins, is more confident, suggesting June’s slower-than-expected inflation reading “all but guarantees” a July rate cut.
“Canadians can breathe a collective sigh of relief after today’s release of the June CPI data,” he wrote. “With headline inflation coming in below last month’s print, May’s re-acceleration in price growth looks like it may have been an aberration in an otherwise good run of data in the first half of 2024.”
Today’s report is “just the latest indicator to reinforce our call for a cut at next week’s Bank of Canada rate announcement.”
Bond markets largely support this call, with the odds of a July 24 rate cut rising to between 70% and 80% following the release of the inflation report. That was up from roughly 60% prior to the release.
Some doubt remains over Bank of Canada rate cut timing
Despite the shifting odds, other economists caution that the central bank could still hold off until its September meeting.
Oxford Economics, for one, continues to believe a September rate cut is more likely.
“The Bank has been clear that it intends to ease policy gradually and we think it will likely want to see more evidence of a sustained slowing in core inflation, weaker economic activity, and building slack in the labour market before cutting rates again,” noted economist Michael Davenport.
Ultimately, however, Davenport says it remains “largely inconsequential” for the broader economic outlook whether borrowers receive a rate reduction this month or next.
“What’s more important is that we think [the Bank] will lower the policy rate at a gradual pace, with one 25bp rate cut pencilled in every quarter between now and mid-2026,” he said. “However, if inflation fails to slow as we expect, the economy avoids the mild downturn we predict or labour markets prove more resilient, the BoC may delay further easing and hold the policy rate higher for longer.”
What’s driving Canada’s inflation numbers?
The easing in June’s headline CPI reading was primarily driven by a 3.1% month-over-month drop in gasoline prices, along with a slowdown in durable goods prices (-1.8% year-over-year) and passenger vehicle costs (-0.4%).
However, there is still upward pressure coming from the services sector, where prices were up 4.8% year-over-year (from 4.6% in May) and food items, with prices accelerating 2.8% year-over-year (up from 2.4% in May).
Shelter inflation remains elevated at an annualized rate of 6.2%, though that’s down from 6.4% in May. Rent inflation also eased slightly to 8.8% (from 8.9%), while mortgage interest costs fell to 22.3% (from 23.3%).
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Bank of Canada Benjamin Reitzes Consumer Price Index (CPI) CPI inflation CPI-median CPI-trim inflation Michael Davenport randall bartlett rate outlook statistics canada
Last modified: July 16, 2024
