Canadian inflation got a bump in last month’s report; new data shows it was just noise. Statistics Canada (Stat Can) data shows the Consumer Price Index (CPI) growth rate slipped in June. The headline inflation measure came in below analyst expectations, clearing the way for the Bank of Canada (BoC) to cut rates further this month. Most experts see this happening, but some still see the central bank exercising caution and waiting until September.
Canadian Inflation If Falling Faster Than Anticipated
Canadian inflation slowed much more rapidly than experts had anticipated. Headline annual growth fell to 2.7% in June, down 0.2 points from a month prior. Most of the downward pressure is the result of falling gasoline prices. Excluding gas shrinks the rate of decline in half.
Canadian Inflation Is Trending Lower
Source: Statistics Canada.
“Slower inflation in June was largely due to a drop in gasoline prices, and lower prices for durable goods such as used cars and furniture,” explains Michael Davenport, an economist at Oxford Economics.
Adding, “… services inflation rose 0.2ppts to 4.8% y/y in June, its second consecutive monthly increase.”
Canadian Inflation Slowed For Goods, But Accelated For Services
Source: Statistics Canada.
Most Experts See Bank of Canada Cutting Rates, But Not All
Generally speaking, service inflation doesn’t seem to be much of a problem, according to experts. The market has already priced in the cut at next week’s meeting, though Davenport still sees the BoC erring on the side of caution.
“This opens the door for a BoC cut in July, but we still think a pause is more likely before another 25bp cut in September,” he explains.
His logic may be sound, but few others agree. In response to this morning’s CPI data, economists at RBC and CIBC shared expectations of a rate cut by the end of this month. The latter even argues it’s needed to help engineer a soft landing with upcoming mortgage rate renewals.
BMO even updated their forecast this morning. The bank expected a September cut until today. The results of yesterday’s BoC Outlook and today’s CPI data was enough to sway their opinion.
“Today’s CPI report, taken with the weak Q2 Business Outlook Survey, the ongoing march higher in the jobless rate, and increased economic slack are expected to provide policymakers with enough confidence that inflation will continue slow to ease policy rates 25 bps to 4.5% on July 24,” explains Benjamin Reitzes, a strategist at BMO.
Regardless of whether rates are cut this month, those expecting a boost to housing activity may be disappointed. The overnight rate primarily impacts variable-rate mortgages, and they currently have much higher interest costs than fixed rate mortgages. A cut may provide a psychological boost, but that’s about it. There are already much cheaper options readily available for borrowers, they just aren’t taking advantage of them.
