Lower inflation in June supports expectations for the Bank of Canada to cut interest rates again
Economists suggest that a recent decline in the national inflation rate may lead the Bank of Canada to make a second consecutive cut to its benchmark interest rate at its upcoming meeting, according to BNN Bloomberg.
Statistics Canada reported on Tuesday that Canada's annual inflation rate fell to 2.7 percent in June, down from 2.9 percent in May. The agency attributed this deceleration primarily to slower growth in gasoline prices, which rose by 0.4 percent in June following a 5.6 percent increase in May.
Excluding gasoline, the consumer price index (CPI) rose by 2.8 percent in June.
Lower prices for durable goods also contributed to the overall slowdown in June, with a 1.8 percent year-over-year decline following a 0.8 percent decrease in May.
Katherine Judge, a senior economist at CIBC, said, “The June inflation data gave the Bank of Canada what it needed in order to cut interest rates at next week’s meeting.”
She also noted that core inflation, which excludes food and energy prices, ticked up by 0.2 percent on a seasonally adjusted basis, down from the previous month’s 0.3 percent gain.
Judge explained, “This shows 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.”
Grocery prices rose by 2.1 percent year-over-year in June, up from May’s 1.5 percent increase from the same month a year earlier, marking the second consecutive month of accelerated growth in grocery prices.
BMO’s Benjamin Reitzes noted that while food price growth remains “relatively subdued” and matches historical norms, a continued increase would be concerning.
He emphasized, “Food prices play a very big role in how people view inflation because we buy food every day. It’s those everyday items that really drive inflation expectations.”
RSM Canada’s economist Tu Nguyen attributed the disinflationary trend to slower growth in gasoline prices and highlighted that shelter inflation is slowing due to an increased supply of new condos.
Nguyen stated in a note to BNN Bloomberg, “We believe that the Bank of Canada should cut the policy rate by 25 basis points next week, bringing the policy rate to 4.5 percent.”
She also mentioned that “disinflation in the US economy points to a (US Federal Reserve) rate cut in September, which limits the divergence in the policy rates between the Bank and the Fed.”
RBC economists Claire Fan and Abbey Xu pointed out that June’s headline inflation rate matched consensus expectations, with the Bank of Canada’s preferred CPI trim and CPI median both dropping monthly.
They stated, “All told, we expect the BoC will carry on with easing the monetary brakes on a weak economy and follow up with another rate cut at its July meeting next week.”
Charles St-Arnaud, chief economist with Alberta Central, also supports expectations for an interest rate cut, noting that shelter costs have been a major reason for previous months’ inflation stickiness.
St-Arnaud explained, “Shelter is such a big component of household spending that it’s probably the reason why we saw yesterday in the (Business Outlook Survey) of consumer expectations that perceived inflation remains extremely high and sticky.”
He added, “We should continue to see further easing in inflationary pressure and, in my view, (the data) should support the Bank of Canada to go ahead and cut again in July and maybe take a longer pause and see how the economy reacts to that 50 basis points cut over the past three to two months.”
The Bank of Canada’s next interest rate decision is set for July 24. The central bank cut its benchmark interest rate by a quarter of a percentage point last June to 4.75 percent.
The latest CPI data indicates Canadian consumers have become more cautious with discretionary spending, with softness noted in recreation, clothing, and shelter spending.
Reitzes commented, “It’s very difficult to make those kinds of forecasts when there are plenty of wild cards out there. It depends what energy prices do. We’ll see what food prices do. There’s lots of political uncertainty out there as well, which could impact the inflation outlook.”
