Major bank economists are still not 100% certain of the BoC's timing
Canada’s Consumer Price Index showed a slower pace of inflation in April, the newly released data shows, but will it be enough to convince the Bank of Canada that it’s time to cut interest rates?
Major bank economists have given their views following the release of April’s CPI by Statistics Canada, with a 2.7% increase reflecting a decrease from the 2.9% rate in March. But despite the stats, which have been easing for four consecutive months, questions still remain about the timing of that first rate cut.
“There is really no debate that monetary policy is tight in Canada, and that it is now consistently weighing on underlying inflation. The key question for the BoC is whether inflation has tamed sufficiently to now start reducing the degree of restrictiveness,” said BMO’s Doug Porter, who believes there is a strong case for a cut on June 5, but says it is a close call and will be gradual as the Fed remains cautious, adding a limit to how far Canada’s central bank can diverge.
The good news for Canadian households already is that the CPI deceleration was driven by slower gains for food prices last month (1.4% year-over-year in April versus 1.9% in March). However, gasoline prices were up 6.1% and exceeded March’s annual gain of 4.5%. Shelter costs were also up 6.4% year-over-year.
Economists’ views
RBC Economics’ Abbey Xu notes that with other economic data – such as GDP-per-capita and unemployment - showing a softer Canadian economy, the BoC will have an expectation that inflation will continue lower.
“The case for interest rate cuts from the Bank of Canada continues to build, with [the latest CPI] report in line with our own base case for a first cut in June,” she said.
Andrew Grantham at CIBC Economics thinks that the BoC should start cutting rates next month, even though the CPI data was in line with consensus expectations.
“we saw continued softness in most core measures of inflation including CPI-Trim and CPI-median which should be enough to bring a first interest rate cut in June,” he said.
TD Economics’ Leslie Preston said that the markets found the inflation number “a bit more reassuring and have increased the odds of a June cut to better than 50-50. But June or July, Canadians can be increasingly confident that alongside lower inflation, interest rates are headed lower soon.”
But outlier Derek Holt of Scotiabank is not convinced we will see any change just yet – and believes that Governor Tiff Macklem should hold off for another month.
“If Macklem cuts on June 5th after saying he wished to wait “months” then the rates complex would probably pile into more cuts for the year as a whole,” he said. “With the Fed signalling it’s in no rush and the BoC already 50bps below with a weaker currency than the Fed is facing, the BoC would risk unmooring CAD and offering a little more upside to what I view as ongoing arguments for viewing full cycle inflation risk as being higher in Canada than the US.”
