Economists predict Bank of Canada will cut interest rates after inflation falls | Benefits and Pension Monitor Industry News
The drop in inflation in June is buoying expectations that the Bank of Canada will cut interest rates again.
According to BNN Bloomberg, economists have suggested that the recent decline in domestic inflation could lead the Bank of Canada to cut its benchmark interest rate for a second consecutive time at its next meeting.
Statistics Canada said Tuesday that Canada's annual inflation rate fell to 2.7 percent in June, down from 2.9 percent in May. The agency attributed the slowdown primarily to slower growth in gasoline prices, which rose 0.4 percent in June after rising 5.6 percent in May.
Excluding gasoline, the Consumer Price Index (CPI) rose 2.8% in June.
Falling prices of durable goods also contributed to the overall slowdown, falling 1.8% year-on-year in June after a 0.8% decline in May.
“June's inflation data provided the Bank of Canada with the information it needs to cut interest rates when it meets next week,” said Catherine Judge, senior economist at CIBC.
It also noted that core inflation, which excludes food and energy prices, rose 0.2 percent on a seasonally adjusted basis, down from the previous month's increase of 0.3 percent.
“This suggests that the upside to inflation last month was only a temporary phenomenon within a broader de-inflationary trend, as demand in the economy remains under pressure,” Judge explained.
Food prices rose 2.1% in June from a year earlier, surpassing the 1.5% increase in May and marking the second consecutive month of accelerating food price increases.
BMO's Benjamin Reitzes said food price increases remained “relatively contained” and in line with historical levels, but continued increases would be a concern.
“Food prices play a huge role in how people view inflation because we buy food every day. It's these everyday items that really drive inflation expectations,” he stressed.
RSM Canada economist Tu Nguyen attributed the de-inflation trend to slowing gasoline price growth, while stressing that home price inflation is slowing due to an increase in the supply of new apartments.
“We believe the Bank of Canada should cut interest rates by 25 basis points to 4.5% next week,” Nguyen said in a note to BNN Bloomberg.
She also said, “Deflation in the U.S. economy suggests an interest rate cut by the (U.S. Federal Reserve) in September, which would limit the divergence between the Bank of Japan and the Fed's policy rates.”
RBC economists Claire Fang and Abby Xu noted that headline inflation in June was in line with consensus expectations, while the Bank of Canada's recommended CPI benchmark and CPI median both fell from the previous month.
“Overall, we expect the Bank of Canada to continue easing the monetary brake on the weak economy and to deliver another rate cut at its July meeting next week,” they said.
Alberta Central chief economist Charles St. Arnaud also supported expectations of a rate cut, noting that housing costs have been a major driver of higher inflation over the past few months.
“Housing is a big component of household spending and that's probably why yesterday's (Business Outlook Survey) consumer expectations showed that inflation perceptions remain very high and robust,” Saint-Arnaud explained.
He added: “Inflation pressures will continue to ease and, in my view, (the data) should encourage the Bank of Canada to cut rates again in July, possibly with a longer pause, to see how the economy responds to the 50 basis point rate cuts of the past three to two months.”
The Bank of Canada's next interest rate decision is scheduled for July 24. The central bank cut its benchmark rate by 0.25 percentage point to 4.75 percent last June.
The latest CPI data shows Canadian consumers are becoming more cautious with discretionary spending, with spending on entertainment, clothing and housing softening.
“It's very difficult to make these forecasts when there are so many uncertainties. It depends on what happens to energy prices. Let's see what happens to food prices. There's also a lot of political uncertainty which could affect the inflation outlook,” Reitzes said.
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