Will economic pressures force a hand, or will caution prevail?
Traders are scaling back expectations for an imminent interest rate cut from the Bank of Canada following April’s inflation report, which revealed persistent core price pressures despite a drop in headline inflation.
Statistics Canada reported yesterday that the consumer price index (CPI) rose 1.7% year over year in April, down from 2.3% in March. The decline was largely attributed to a 12.7% fall in energy prices following the removal of the federal carbon tax on consumers. A report from The Globe and Mail noted that economists had expected a slightly sharper decrease to 1.6%.
Inflation’s mixed signals
Core inflation measures, which strip out volatile items and are closely monitored by the BoC, showed signs of renewed strength, however. CPI-median rose to 3.2% from 2.8% in March, while CPI-trim increased to 3.1% from 2.9%. These are the highest levels in more than a year, complicating the central bank’s path forward.
The release marks the second-to-last major data point before the BoC’s June 4 rate decision. First-quarter GDP figures, due May 30, will likely be pivotal. The Bank held its overnight rate at 2.75% in April, stating it was ready to act decisively if inflation risks remained.
Markets responded swiftly. The Canadian dollar edged up against the US dollar, and the two-year government bond yield jumped nearly 10 basis points to 2.63%.
Economists divided
Implied probabilities in the swaps market now suggest less than a 50% chance of a rate cut in June, down from 65% before the inflation data. Despite the shift, traders still forecast one or two cuts by year-end.
Economists are divided. Capital Economics and Desjardins maintain that a June cut remains likely, citing weakening economic indicators and the temporary nature of some inflation drivers. “While this level of underlying inflation is still too high for the Bank of Canada’s comfort, the Bank’s mostly dovish tone in April suggests it is more focused on economic risks,” said Thomas Ryan of Capital Economics.
Others caution against premature easing. Scotiabank’s Derek Holt argued the BoC should hold steady, citing sticky inflation and potential fiscal stimulus ahead. BMO’s Douglas Porter noted that underlying inflation is now above projections from the BoC’s April Monetary Policy Report.
Shelter and food costs remain key inflation contributors, although shelter prices declined month over month for the first time since 2022, noted Nick Rees, head of macro research, Monex Canada, a foreign exchange firm. Economists at RBC and Mackenzie Investments suggested the BoC will likely wait until July to cut, pending further clarity on growth and fiscal policy.
Given the latest inflation data, do you think the Bank of Canada should still consider a June rate cut? Share your insights in the comments below.
