What could prevent the Bank of Canada from cutting rates further?

Economists are anticipating a further decline in Canada's inflation rate for May, potentially leading to another interest rate cut by the Bank of Canada in July.

Statistics Canada releases its latest inflation report on Tuesday, offering the first glimpse into inflation since the Bank of Canada lowered its key lending rate to 4.75%.

Economists from BMO and TD are forecasting a drop in annual inflation to 2.6% and 2.5% respectively, down from 2.7% in April.

“It looks like it’s a fairly uneventful calm month for inflation," BMO chief economist Douglas Porter told The Canadian Press. " I would say at this stage, less news is good news."

Porter and James Orlando, TD director of economics said the next two inflation reports hold the key to unlocking another rate cut by July 24th.

"[The inflation reports] will open the door for potentially the Bank of Canada deciding to go back-to-back on rate cuts," Orlando said.

Porter agreed, saying that it would likely take a “bad reading” in either of the next two inflation reports to prevent the Bank of Canada from cutting.

The Bank of Canada's rate cut marked a turning point in its fight against inflation, which peaked at 8.1% in mid-2022. Canada was also the first G7 nation to lower interest rates, followed shortly by the European Central Bank.

Governor Tiff Macklem, following the rate announcement, highlighted various indicators suggesting receding price pressures and expressed increased confidence in inflation approaching the Bank of Canada's 2% target.

The Bank of Canada recently published a summary of its June 5 rate decision deliberations, revealing discussions about delaying the cut.

Read more: Bank of Canada council unanimous on June rate cut, minutes reveal

While four consecutive months of declining core inflation and indicators pointing towards continued downward trends, the summary said there was "sufficient progress to warrant a first cut in the policy rate."

The Bank of Canada is maintaining a cautious approach, emphasizing that future interest rate decisions will be made on a case-by-case basis.

The central bank has been particularly encouraged by the recent slowdown in core measures of inflation, which help gauge underlying price pressures and future inflation trends.

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