The recent surveys reveal subdued inflation expectations, supporting potential rate cuts
Bank of Canada surveys show business and consumer expectations for inflation are subdued, leaving room for further rate cuts in the coming months, as reported by BNN Bloomberg.
Released Monday in Ottawa, the surveys indicate slowing growth in firms’ input and selling prices amid a weaker economic backdrop. Policymakers believe this supports the view that inflation will continue to ease over the next 12 months.
Traders have increased bets on a policy interest rate cut next Wednesday, estimating the odds at around 80 percent.
“Firms’ expectations for inflation fell in June and are now in the Bank of Canada’s inflation-control range,” the central bank stated. The consumer survey shows similar results, with short-term inflation expectations beginning to ease.
Businesses report their sales outlook remains little changed from the last quarter, with firms anticipating “soft demand” in the future, according to the survey of companies. The central bank’s business outlook indicator fell to minus 2.9 in the second quarter, down from minus 2.4 previously.
The share of firms reporting labour shortages is near a record low, and expectations for wage increases over the next year have slowed. Overall, capacity constraints have “returned close to their historical average.”
“The Business Outlook Survey suggests a pretty dovish economic backdrop, and they can point almost any section of that report to justify cutting rates again at the upcoming meeting,” said Andrew Kelvin, head of Canadian and global rates strategy at TD Securities, via email.
Both surveys were conducted before the Bank of Canada cut the policy rate to 4.75 percent at its June 5 meeting and indicated more easing could come if disinflation continued. In the business outlook survey, firms expect rates to decline by 0.5 to 1 percentage points in the next 12 months.
Investment plans remain weak, with more firms planning to replace machinery and equipment rather than improve productivity or output. Businesses’ top concerns have shifted to taxes and regulations, though uncertainty and cost pressures remain significant issues.
About a fifth of firms expect a recession in the next year, a decrease from the previous quarter.
“The ongoing softness in the economic backdrop and increasing slack in the labour market are supportive of further cuts from the Bank of Canada,” said Benjamin Reitzes, rates, and macro strategist at Bank of Montreal, via email.
Statistics Canada will release inflation data for June on Tuesday, the last major data point before the central bank sets rates next week. A slim majority of economists surveyed by Bloomberg expect policymakers to hold rates steady.
The bank highlighted that respondents to the consumer survey still see domestic factors, including fiscal policy and elevated housing costs, as “contributing to high inflation.” Home-buying intentions are near historical averages, supported by “strong plans” among newcomers to buy homes.
