After Statistics Canada reported that Canada’s annual inflation rate fell to 2.7 per cent in June on Tuesday, economists weighed in on what the latest consumer price index (CPI) data means for the Bank of Canada.
RSM Canada
Tu Nguyen, economist with RSM Canada, says June’s inflation report confirms that the Canadian economy is firmly on a “disinflationary trajectory… due to slower growth in gasoline prices,” adding that core measures of inflation saw little change last month.
In a note sent to BNNBloomberg.ca, Nguyen said that shelter inflation is showing signs of slowing thanks to an increased supply of new condos in the market. “There was no surprise in the data as all categories saw inflation stay steady,” she said.
Nguyen added that an interest rate cut by Canada’s central bank seems likely when it announces its next rate decision on July 24.
“We believe that the Bank of Canada should cut the policy rate by 25 basis points next week, bringing the policy rate to 4.5 per cent,” she said in the statement.
“Inflation is on track to reach 2.5 per cent this year and return to two per cent next year. Keeping the policy rate unnecessarily restrictive risks a policy error and raises recession odds.”
Nguyen also mentioned that disinflation in the U.S. economy “points to a (U.S. Federal Reserve) rate cut in September, which limits the divergence in the policy rates between the Bank and the Fed.”
RBC
June’s headline inflation rate matched consensus expectations, says RBC economists Claire Fan and Abbey Xu, who released a CPI report responding to Tuesday’s CPI data.
“(The) Bank of Canada’s preferred CPI trim and CPI median both dropped lower on a monthly basis although the narrower ‘supercore’ measure held slightly higher,” Fan and Xu said.
They added that Monday’s second quarter release of the Bank of Canada’s Business Outlook Survey “largely confirmed further normalizing in a few key areas that the central bank has deemed critical to future inflation trends, including firms’ pricing behaviour, their expectations for inflation in the future as well as wage growth.”
Fan and Xu also expect another rate cut as early as next week.
“All told, we expect the BoC will carry on with easing the monetary brakes on a weak economy, and follow up with another rate cut at its July meeting next week.”
CIBC Capital Markets
Katherine Judge, director and senior economist at CIBC Capital Markets, says the Bank of Canada “got what they wanted” with Tuesday’s CPI release.
During an interview with BNN Bloomberg on Tuesday, Judge explained that the latest CPI numbers help “justify” a rate cut next week.
“When you look at their key core measures -- which are CPI Trim and Median -- they slowed on a monthly basis and their six-month-rates are now just a hair above target. So they really have what they need.”
Judge said that a major driver of inflation is not demand-driven, as “the underlying economy is so weak because we’ve seen this big climb in the unemployment rate.”
“This is really telling us that interest rates do not need to be this restrictive. We’re still at very restrictive levels.”
Judge said that “a lot of consumers are planning to cut spending over the coming months.”
“We have this wave of mortgage renewals coming where mortgages that were taken out during the lows of interest rates will be renewing at higher interest rates even as the Bank of Canada is cutting,” she said.
“So that’s a very negative impact on consumer spending. At the same time we have population growth. All of these factors suggest that we need interest rate relief relatively swiftly.”
Alberta Central
Charles St-Arnaud, chief economist with Alberta Central, says the latest CPI data confirms disinflationary progress and supports expectations for an interest rate cut next week.
During an interview with BNN Bloomberg on Tuesday, St-Arnaud explained that shelter costs were a major reason for inflation “remaining sticky” during previous months.
“In my view, it’s more about how it’s affecting inflation expectations. Shelter is such a big component of household spending that it’s probably the reason why we saw yesterday in the (Business Outlook Survey) of consumer expectations that perceived inflation remains extremely high and sticky,” he said. “But that component should start to ease in the coming months.”
He added that inflation expectations are gradually coming down.
“We should continue to see further easing in inflationary pressure and, in my view, (the data) should support the Bank of Canada to go ahead and cut again in July and maybe take a longer pause and see how the economy reacts to that 50 basis points cut over the past three to two months.”
