Easing inflation shifts expectations for the central bank's next move
Bank of Nova Scotia is likely to revise its forecast for the Bank of Canada's first interest rate cut from September to July, following recent data indicating a consistent easing of inflation.
"Clearly this inflation report confirms rate cuts are coming," the bank’s chief economist Jean-Francois Perrault said in an interview with Bloomberg.
If Scotiabank officially revises its prediction, it would align with Canada's five other major banks, all anticipating the Bank of Canada to begin lowering the benchmark overnight rate from 5% in either June or July.
This expectation shift comes after Statistics Canada reported four consecutive months of easing core inflation.
Royal Bank of Canada, Canadian Imperial Bank of Commerce, and Bank of Montreal predict a first cut in June, while Toronto-Dominion Bank and National Bank of Canada lean towards July, the date Scotiabank is tentatively considering.
Traders increased their bets for a rate cut at the Bank of Canada's June 5 meeting to just under two-thirds probability after the inflation data release, up from around 40% beforehand. Markets are fully pricing in at least a 25-basis-point cut by the July 24 decision.
Perrault suggested that waiting until July would allow the central bank to assess inflation dynamics and economic growth more thoroughly. Preliminary data indicates a 2.5% annualized GDP growth in the first quarter, slightly below the central bank's forecast of 2.8%. The official figures will be released on May 31.
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Perrault also believes that the central bank should consider the Federal Reserve's policy path and the potential impact of rate cuts on Canada's housing market.
There is absolutely an expectation that when rates start to come down, that you’ll see a pickup in the housing market,” he said.
Derek Holt, another Scotiabank economist, wrote that April's inflation print marked a fourth "soft reading" in a row.
“The key question is whether that’s enough to prompt the Bank of Canada to cut as soon as two weeks from now on June 5 or whether patience while seeking more data and other arguments to holding off will dominate,” Holt said in a report to investors, adding that a July cut is "most probable."
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