Economists and market watchers are firming up their bets for Bank of Canada interest rate cuts after another soft inflation report showed more signs of easing price pressures.
The annual inflation rate slowed to 2.7 per cent in April, Statistics Canada said Tuesday, as cooling grocery price pressures offset higher fuel costs.
Inflation on food bought from the grocery store slowed to 1.4 per cent annually last month, down from 1.9 per cent in March, according to the agency.
Slowdowns in annual price growth for meat, non-alcoholic beverages and bakery and cereal products helped to pull down the yearly inflation rate, StatCan said. Fruits, nuts and seafood products meanwhile saw annual price declines.
Taking a longer view, the agency noted that prices at the grocery store had jumped 21.4 per cent from April 2021.
Household furnishings and the clothing and footwear categories saw outright declines in prices year-over-year, according to StatCan.
But gas prices were growing at a faster annual pace as consumers paid 7.9 per cent more month-to-month in April. Higher global oil prices, gas stations switching to more expensive summer blends and a hike in the federal carbon levy contributed to the gain, StatCan said.
Rising costs for rent and homeowners renewing their mortgages continue to put upward pressure on shelter inflation.
April was particularly difficult for renters in Alberta, according to the agency. Rent prices were up 16.2 per cent year-over-year in the province, almost double the 8.2 per cent hike nationally.
Prices rose on a month-to-month basis in April, but because the jump was smaller than the same time last year, the overall inflation rate slowed from 2.9 per cent in March.
Randall Bartlett, senior director of Canadian economics at Desjardins, told Motorcycle accident toronto today in an interview that everything is “trending in the right direction” when it comes to inflation.
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While shelter remains “red hot” and gas prices are putting pressure on the consumer price index, he said there is otherwise “broad-based” deceleration in inflation.
“It really is a story now of largely one or two sectors that are driving a big part of what we’re seeing in terms of the headline (inflation number),” he said.
Inflation now stands at its lowest point in three years. Speaking to reporters on Tuesday, Finance Minister Chrystia Freeland said the April report was “really good news for all Canadians,” noting annual wage growth had outpaced inflation for more than a year.
April’s report marks the fourth consecutive “tame” reading for the annual inflation index, BMO chief economist Doug Porter said in a note to clients Tuesday morning. It also marks the final reading the Bank of Canada will get on price pressures ahead of its next interest rate decision on June 5.
‘The door is open’ for a June rate cut
All of the central bank’s preferred metrics of “core” inflation also cooled below three per cent in April, according to StatCan’s report.
The Bank of Canada has said it wants to see signs that the easing in underlying inflation will be sustained before it’s ready to deliver cuts to its benchmark interest rate.
“Today’s data should have provided the all clear on the inflation front that the Bank of Canada needed to start cutting interest rates in June,” said CIBC senior economist Andrew Grantham in a note to clients Tuesday.
Grantham pointed to Bank of Canada governor Tiff Macklem’s remarks at the time of the central bank’s April rate hold, where he said monetary policymakers were “encouraged” by recent progress but needed more signs of persistent cooling. Since then, the Bank of Canada has gotten two solid inflation reports showing more easing, he noted.
Porter said the soft April inflation report means “the door is open” for a rate cut, “but it remains a close call.” Porter said BMO has been leaning towards a June rate cut for the past six months.
TD Bank’s managing director and senior economist Leslie Preston said in a note that with core inflation still close to the top bound of the Bank of Canada’s one-to-three per cent target range, she believes the central bank will want to be patient and lean towards a July rate cut rather than June.
After the data’s release, money markets increased their bets for a June rate cut to almost 55 per cent from 39 per cent earlier, according to Reuters.
Bartlett is also in the camp for a June cut. He told Motorcycle accident toronto today that he expects the Bank of Canada will be “satisfied” with this inflation report.
He noted however that the April jobs report was surprisingly strong, which may “cast some doubt” among forecasters about whether there’s been enough easing in the labour market to loosen monetary policy. But there were also signs of slowing in annual wage growth last month, he added, and other economic indicators are also pointing towards diminishing inflationary pressure going forward.
“When you take this all into account – the inflation, GDP growth, labour market, plus things like business insolvencies, survey data from the Bank of Canada and elsewhere – overall, it points to the most likely date of a cut being at their June meeting,” Bartlett said.
Whether the Bank of Canada cuts in June, July or beyond, Bartlett said he doesn’t expect the pace of easing to be as rapid as the tightening that saw a jump of 4.75 percentage points in the policy rate over roughly two years.
Instead, he said the central bank is likely to pay close attention meeting-to-meeting whether short-term data is continuing to show disinflationary forces working their way through the economy. Future rate decisions could fluctuate between a rate hold or a small decrease of 25 basis points, he said.
The pace of interest rate cuts from the U.S. Federal Reserve will also hold some bearing on the Bank of Canada, as Bartlett said the Canadian central bank will not want to diverge too far from its American counterpart, lest the loonie depreciate and fuel inflation on imports from south of the border.
“We think it’s going to be a cautious approach to gradually cutting interest rates just to make sure inflation gets back down to target,” he said.