The Bank of Canada should cut rates later this month based on June’s CPI figures. Today’s data confirms that May’s inflation uptick was a blip, whilst the balance of economic risks looks increasingly skewed to the downside.
If anything, expectations ahead of today’s print were distinctly unambitious, with markets only anticipating price growth of 0.1% MoM in June. This latest data managed to undershoot even this low bar – aggregate prices fell outright, declining by -0.1% last month. All told, this left inflation running at 2.7% YoY, fully reversing May’s upside surprise. Placed against the backdrop of a weak labour market, soft economic growth, and the BoC’s business outlook survey for Q2 that pointed towards sustained downward pressure on inflation going forwards, today’s figures should be the last piece in the puzzle ahead of the BoC’s meeting next week.
All indicators suggest that inflation is on its way back to target and rates that are, if anything, too tight –we think a July rate cut should now be a done deal for the Governing Council.
Admittedly, when looking at the details of today’s report, the data does not conclusively signal renewed disinflation at first glance. As noted by StatCan, the deceleration in headline price growth seen in June was largely a result of slower YoY growth in gasoline prices. As they point out, gas prices rose just 0.4% YoY in June following a 5.6% increase in May – excluding gasoline, CPI rose 2.8% YoY. Moreover, when considering underlying inflation pressures, the BoC’s preferred measures offered a mixed set of signals based on June data too. On the one hand, core median CPI rose by 2.6% YoY, 0.1pp below both a downwardly revised May print and market expectations. On the other, core trim inflation landed at 2.9% YoY, in line with May’s reading and 0.1% above economist consensus.
That said, our own favoured inflation indicators continue to tell a far clearer story. Core CPI ex-shelter was virtually unchanged at 0.74% YoY versus 0.72% in May on an unrounded basis, while CPI excluding rent and mortgage costs fell from 1.06% YoY to 0.91%, with both well below the BoC’s 2% inflation target.
Shelter inflation, meanwhile, arguably the single biggest factor underpinning Canadian inflationary stickiness to date, also eased notably in June. In fact, the 0.33% MoM increase in prices was the lowest reading recorded since February 2023, while momentum across shelter components points towards a continued slowdown moving forward.
Taking all this into account, we think there is little reason for the BoC to hold rates this month.
Such a view appears to be shared by traders too, with swap market implied odds of a rate cut next week rising from 70% this morning, to 90% post-release. Even so, the currency market reaction has, for the time being, been muddied by the simultaneous release of US retail sales data which landed broadly stronger than expectations. The upshot is that USDCAD looks even cheaper now than it did pre-release – we still expect to see the pair trading above 1.38 by month-end.
Canadian inflation continues to cool, with all indicators of underlying price growth lying within the BoC’s tolerance band
Author:
Nick Rees, FX Market Analyst