The Bank of Canada will get one final read of inflation figures this week before it has to make its next interest rate decision, with some economists predicting a return to cooling will fuel hopes for another cut.
Statistics Canada is set to release its consumer price index (CPI) figures for June on Tuesday.
The Bank of Canada will be watching the updated inflation figures closely, particularly after a surprise uptick in price pressures the month before.
Inflation accelerated to 2.9 per cent annually in May, a move that surprised most economists who had expected CPI would continue to follow the cooling trends seen through much of 2024.
Just a few weeks before the May inflation surprise, the Bank of Canada had dropped its benchmark interest rate by a quarter of a percentage point, the first rate cut in more than four years and a significant shift in the direction of monetary policy.
Tiff Macklem, the central bank’s governor, said then that Canadians can expect to see more interest rate cuts as long as inflation continues to cool according to the Bank of Canada’s forecasts.
Avery Shenfeld, chief economist at CIBC, tells Global News that he believes May’s inflation uptick will be an outlier rather than the start of a reacceleration in price growth.
“We’re hoping that May’s significant increase was a bit of a one-off,” he says.
“The economy does seem to be cooling. There are more workers out there looking for jobs. That tends to promote slower inflation, and that’s what we expect to see in June.”
Economists at Royal Bank of Canada are similarly expecting a return to easing price pressures.
Annual inflation is expected to slow to 2.7 per cent in the month amid slowing energy price hikes and further cooling at the grocery store, according to an outlook from RBC’s Nathan Janzen and Abbey Xu.
Will the Bank of Canada cut again?
Both CIBC and RBC are expecting that a drop in inflation will set up the Bank of Canada to deliver back-to-back rate cuts at its next decision on July 24.
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Shenfeld says the central bank will be watching its preferred measures of core inflation, which also accelerated in May, for signs of renewed cooling. If monetary policymakers see that, it “leaves the door open for them to cut rates again this month.”
In the “big picture,” Shenfeld says that inflation is still running below the Bank of Canada’s latest forecasts released in April. Elsewhere, economic growth continues to hold barely positive and the rising unemployment rate suggests the once-tight labour market continues to slacken.
If May’s inflation surprise indeed ends up a blip on the central bank’s radar, Shenfeld says there are enough signs pointing to inflation coming down in the months ahead that Macklem and his peers can be confident that they can ease borrowing costs without risking progress to-date in taming price pressures.
“Those are all very good reasons for the Bank of Canada to try to find opportunities to bring some relief on the interest rate front,” he says.
Elsewhere on Monday, the Bank of Canada itself released its Business Outlook Survey (BOS), which indicates how businesses expect the economy to evolve.
Shenfeld said heading into the release that the key input to watch here will be wage growth, which is one area of the labour force survey that had remained hot amid signs of cooling elsewhere in the economy.
The BOS showed the average expectations for wage growth have “declined significantly” for the coming year. Businesses no longer feel as much need to hike payrolls to keep pace with the rising cost of living or to meet market wage standards, the Bank of Canada said in the report.
“On balance, firms no longer see a need for higher wages to attract or retain workers,” the central bank said.
Labour shortages are also no longer high on businesses’ lists of concerns, but “few firms plan to reduce headcounts,” the report notes.
Taken together, businesses indicate that they continue to see a tough road ahead amid high costs and borrowing rates as well as declines in consumer spending, particularly for discretionary goods. But fewer respondents to the survey said they’re expecting a recession in the coming year.
Price normalization continued with fewer firms planning abnormally large or frequent price hikes in the year ahead. Businesses’ expectations for inflation over the next 12 months also fell into the central bank’s one-to-three per cent target range in this latest survey.
“The data should help reinforce that interest rates no longer need to be as high as they are to get inflation sustainably under control,” Janzen wrote in an RBC note to clients on Monday.
He reiterated that Tuesday’s inflation figures will have a greater bearing on the Bank of Canada’s final decision at next week’s meeting.
“But absent a significant upside surprise, the (Bank of Canada) looks on track to cut interest rates again,” Janzen wrote.
CIBC, TD Bank and BMO economists similarly said in notes Monday that the BOS results set up conditions for another cut, with June inflation data likely holding the final say.
As of Monday, Reuters reports that financial markets see a 73 per cent chance of another 25 basis point cut at the July 24 interest rate announcement.
— with files from Reuters
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