The update prompted economists to suggest that the Bank of Canada (BoC) might cut interest rates as early as June. This trend presents a positive outlook for the Canadian economy and supports the possibility of a rate cut this summer.
Sal Guatieri, director and senior economist at BMO Capital Markets, remarked that the core measures of inflation closely monitored by the BoC, specifically the median and trimmed mean inflation rates, have declined significantly, with the trimmed mean falling below three per cent. He noted that aside from rising housing costs, overall inflationary pressures have substantially diminished. The Consumer Price Index (CPI)), excluding shelter costs, showed an increase of only 1.2 per cent over the past year.
Guatieri highlighted that while the recent inflation data supports a potential rate cut, it remains uncertain whether the BoC will act in June or wait until July to ensure sustained disinflation. The upcoming decision hinges on whether the bank’s criteria for a sustained decline in core inflation are met.
Tu Nguyen, an economist at RSM Canada, expressed strong confidence in a June rate cut, describing the latest CPI data as a decisive factor. She emphasised that headline inflation has dropped to its lowest level since early 2021, and with the economy exhibiting continued disinflation over the past four months, the BoC has clear grounds to reduce rates without delay. Nguyen also pointed out that despite the possibility of higher gasoline prices during the spring and summer, consumers are seeing relief from high food inflation, with grocery prices rising only modestly.
Andrew Grantham, executive director of economics at CIBC Capital Markets, concurred, noting that while the headline CPI met consensus expectations with a 0.5 per cent rise for an annual rate of 2.7 per cent, core measures like CPI-Trim and CPI-Median continued to show softness. This trend supports the likelihood of a rate cut in June. Grantham highlighted that seasonally adjusted food prices fell slightly, contributing to a broader deceleration in inflation. The CPI-Trim eased to 2.9 per cent, and the CPI-Median fell to 2.6 per cent, both below consensus expectations, reinforcing the case for a June rate cut.
Abbey Xu, an economist with RBC, echoed these sentiments in a report, noting that April’s inflation readings aligned with economic expectations and pointed to a reduction in inflationary pressures. Xu emphasised that the BoC is not only concerned with current inflation rates but also future trends. With Canada’s economic backdrop showing signs of slowing price growth due to declining per-capita GDP and rising unemployment, the case for a rate cut strengthens.
In summary, the latest inflation data provides a compelling case for the BoC to reduce interest rates in June. The easing of core inflation measures, coupled with a softer economic backdrop, aligns with economists’ expectations and supports the potential for monetary easing to aid economic recovery in the latter half of the year.
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