Rate cut expectations rise as underlying price pressures ease in March
Consumer prices in Canada rose 2.9% in March compared to the previous year, matching expectations, while core inflation metrics showed signs of easing.
The Consumer Price Index (CPI) inched up one basis point from February to 2.9% in March, the latest Statistics Canada report revealed.
However, the bank’s two core inflation metrics, when excluding gasoline, slowed to a 2.95% annual pace, down from 3.1% in February and below the 3.1% consensus forecast. Month over month, the CPI increased 0.6%, which was slightly below the expected 0.7%, according to Bloomberg.
The data bolsters arguments within the Bank of Canada’s governing council that the slowdown in core inflation is not temporary.
“Today’s data meets that requirement, although there is one more CPI print to come before the Bank’s next policy decision,” Andrew Grantham, an economist at Canadian Imperial Bank of Commerce, said in a statement. “We continue to expect a first cut at that June meeting.”
The Bank of Canada expects inflation to remain around 3% in the coming months before easing later this year. Officials are closely watching for signs of a sustainable decline toward the 2% target before making further rate adjustments.
“There are still some risks to that view, most notably the potential for a much larger rise in oil prices amid an escalation of tensions in the Middle East,” said Olivia Cross of Capital Economics. “The good news for the bank is that thanks to more favorable base effects from here, there is scope for headline inflation to fall in the coming months despite the rise in gasoline prices so far.”
The inflation report led to a drop in yields on two-year Canadian government bonds. The Canadian dollar briefly traded lower against the US dollar before recovering some losses.
Read next: Could rising US inflation spell trouble for the Bank of Canada?
Traders also raised their bets on the Bank of Canada’s 25-basis-point rate cut at its June meeting to more than two-thirds probability.
“The inflation data for March should give monetary policymakers confidence that the progress made in taming consumer price pressures is sustainable,” said Royce Mendes, head of macro strategy at Desjardins Securities.
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