Inflation is ticking lower on both sides of the border
Recent inflation data in Canada and the US have spurred optimism in both countries that interest rates could be on the way down in the months ahead.
Yesterday’s Canadian consumer price index (CPI) reading showed that inflation fell to 2.7% in June, marking its sixth consecutive month within the Bank of Canada’s target range and a bigger decline than analysts surveyed by Reuters had expected prior to the announcement.
That news arrived less than a week after inflation south of the border cooled for the third month in a row, a development which – along with a slowing labor market – has pushed market expectations of a Federal Reserve rate cut in September to 100%.
The Bank of Canada has already lowered interest rates once and is likely to make its next cut even sooner than the Fed, according to Ratehub’s Penelope Graham (pictured top).
The mortgage expert told Canadian Mortgage Professional that Tuesday’s inflation data had likely given Canada’s central bank the green light to push ahead with another cut in its next rate decision, scheduled for next Wednesday. “The headline CPI measure indicates the economy is broadly slowing, and there’s been further progress seen among the core inflation measures – which the [Bank] keeps a keen eye on,” she said. “All indicators point to a likely cut on July 24.”
The central bank’s latest survey of consumer and business sentiment also suggested that inflation expectations and companies’ pricing behaviour are likely to continue moderating, leaving the door open for a July cut.
#BreakingNews: Overall inflation rate fell to 2.7% last month, spurred in part by cooler gasoline price growth, after an unanticipated uptick in May, according to Statistics Canada.
— Canadian Mortgage Professional Magazine (@CMPmagazine) July 16, 2024
Read more: https://t.co/2v4LNVSqFm
Investment spending plans are also rooted below average, the Bank of Canada said, with business owners seemingly pessimistic about the outlook for the future of the economy.
Royal Bank of Canada (RBC) economist Claire Fan said in a note after Tuesday’s CPI reading that the central bank will probably “carry on with easing the monetary brakes on a weak economy” by lowering rates next week.
US, Canadian inflation on a similar path – in a positive sign for Canada
Moderating inflation in the US is also good news for Canada, particularly with plenty of speculation about how far the Bank of Canada can afford to diverge from the Fed’s approach on rates without damaging the loonie.
While policymakers moved rates lower by 25 basis points in Canada at the beginning of June, the Fed has opted to leave its key rate unchanged since last year as it awaits more concrete evidence that economic indicators are trending in the right direction.
Persistent inflation with little sign of a letup in the US labor market’s performance would likely convince the Fed to keep rates where they are and run the risk of a big gap emerging if the Canadian central bank pushes ahead with further cuts regardless.
That’s why cooling US inflation will be greeted with a sigh of relief in Canada. The two countries “generally have to move in tandem,” Graham said, “and because we’re such close trade partners, the economic factors that are impacting inflation in the US are proudly the same as what’s happening in Canada.
“We tend to suffer from the same supply chain logistics issues. Certain indicators like labour and such can differ but from a very broad-picture perspective, what’s good for the US is good for Canada – and that will be reflected in what the Bank of Canada is paying attention to.”
Bank of Canada likely to push ahead with a July rate cut, says BMO
Bank of Montreal (BMO) managing director, Canadian rates and macro strategist Benjamin Reitzes also viewed Tuesday’s inflation reading as a good enough reason for the Bank of Canada to trim interest rates next week, noting that it reinforced the idea of consumers’ growing caution over discretionary spending.
While food prices and insurance costs were up, recreation, clothing, and travel tours all saw continued softening – and inflation is clearly on a “slow but steady” march back towards 2%, Reitzes said in a note.
Declining inflation, coupled with the Bank of Canada’s survey on the business outlook, a weakening labour market and a sluggish economy, he added, “are expected to provide policymakers with enough confidence that inflation will continue slow to ease policy rates 25 [basis points] to 4.5% on July 24.”
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