Speculation grows over potential Canadian rate cuts after US data
The latest US inflation data has sparked renewed expectations of interest rate cuts, potentially influencing the Bank of Canada's upcoming decision.
The US Consumer Price Index (CPI) report released yesterday (July 11) showed inflation slowing to 3% in June, down from 3.3% in May and below economists' predictions of 3.1%.
This development increases the likelihood of rate cuts by both the US Federal Reserve and the Bank of Canada, according to Ratehub.
“The Canadian and American economies are very closely intertwined, especially when it comes to the cost of borrowing,” Penelope Graham, director of content at Ratehub, wrote in a blog post. “Historically the BoC and the Fed have mirrored each other in terms of monetary policy.”
The US inflation slowdown followed comments by Federal Reserve Chair Jerome Powell, who told US Congress this week that inflation has "eased considerably" since 2022. Powell also noted a cooling in the American job market, with unemployment rising for three consecutive months to 4.1%.
While the Bank of Canada has already cut its benchmark rate once in June to 4.75%, markets have been uncertain about further cuts. The US inflation data has now "stoked new optimism that the BoC will be in a cutting mood," Graham explained.
The interplay between US and Canadian monetary policy stems from their close economic ties. Both countries experienced record inflation peaks following pandemic lockdowns, driven by supply chain challenges and rebounding consumer demand
Read more: Could an aggressive US Fed impact Canada interest rates?
However, Canada has made faster progress in controlling inflation, allowing for its June rate cut. The upcoming Canadian June inflation report, due on July 16th, will be crucial in determining the BoC's next move.
The positive US inflation news has already impacted financial markets, with bond yields falling. The five-year Government of Canada bond yield has dropped to around 3.3%, down nearly 23 basis points in five days. This decline is expected to lead to lower fixed mortgage rates for Canadian consumers.
The Bank of Canada's next rate announcement is scheduled for July 24th.
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