5/21/2024
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Posted in Canadian Economy and Interest Rates by Vanguard Realty | Back to Main Blog Page
Canada’s headline inflation rate continued to ease in April, leaving the door open to a Bank of Canada rate cut next month.
However, with inflation still at the upper limit of the Bank’s neutral range, the odds of a June rate cut remain around 50-50.
Statistics Canada reported today that annualized Canadian CPI slowed to 2.7% in April, down from 2.9% in March and in line with expectations. The slowdown was driven by a deceleration in food prices, services and durable goods.
The Bank of Canada’s preferred measures of core inflation, which strip out food and energy prices, also continued to ease, with CPI-median slowing to 2.6% (from 3.1% in March) and CPI-trim falling to 2.9% from 3.2%.
On a three-month annualized basis, however, economists from Desjardins note that these measures did pick up slightly in April, rising 0.2 percentage points each.
The Bank of Canada’s former preferred measure of inflation, CPI-X—which some economists argue is a better measure of core inflation—was flat in April, resulting in an annualized rate of just 1.6%.
“All of these yearly measures of core are at lows not seen since mid-2021, or when rates were still at the floor and hikes weren’t even being pondered yet,” noted BMO’s chief economist, Douglas Porter.
While shelter costs remain the leading upward driver of inflation, its pace did ease in April, slowing to an annualized rate of 6.4% from 6.4% in March. That was driven by a slight easing in rent inflation, which slowed to 8.2% from 8.5%, while mortgage interest cost also eased slightly to 24.5% from 25.4%.
June rate cut basically a toin coss
With four consecutive “tame” inflation reports, many experts argue the Bank of Canada can safely begin easing its benchmark interest rate at its upcoming meeting on June 5.
“There is really no debate that monetary policy is tight in Canada, and that it is now consistently weighing on underlying inflation,” Porter noted. “The key question for the BoC is whether inflation has tamed sufficiently to now start reducing the degree of restrictiveness.”
With the latest soft April inflation readings, Porter says the “door is open” for a Bank of Canada rate cut in June, but that it remains a “close call.”
Leslie Preston at TD Economics echoed those thoughts, saying that while the preferred inflation gauges moved into the 1-3% target range for the first time in nearly three years, “at 2.8% it is still close to the top of the BoC’s range.”
“We expect the bank will want to see a bit more confirmation before taking rates lower and lean towards a July cut,” she added.
Bond markets are currently pricing in roughly 53% odds of a 25-bps cut next month, up slightly from prior to the inflation data release. Odds of a quarter-point rate cut in July are around 72%.
Source: Canadian Mortgage Trends
Bank of Canada, Bank of Canada Benchmark Rate, Canada Inflation Rate, Canadian Housing Market, Variable Rate Mortgages
