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Canadian inflation slowed to 2.5% in July, matching consensus estimates. Moreover, with this disinflation progress replicated across the consumption basket, today’s data should confirm a rate cut from the Bank of Canada next month.
The July policy meeting saw Governor Macklem suggest that rate cuts would be on the table if data continued to cool in line with expectations. Today’s readings meet that threshold.
We continue to look for 25bps of easing from the Governing Council in September and at every remaining meeting this year.
Looking through the July CPI figures, there is little to favour anything other than a succession of 25bp cuts from the BoC as we see it. Not only did the headline figure ease, but price growth also fell 0.15pp to 2.7% YoY after excluding volatile food and energy components. Perhaps more relevant for the Governing Council, the BoC’s preferred measures of underlying inflation recorded another drop last month. Core trim-CPI growth fell to 2.7% YoY, 0.1pp below a downwardly revised June reading of 2.8%. Similarly, core-median CPI slipped to 2.4% YoY, 0.2pp down from 2.6% in June.
Moreover, while less of a focus for policymakers, our own favoured measures of underlying inflation also slowed last month.
Core CPI ex-shelter fell from 0.74% YoY to 0.65%, while the less restrictive CPI excluding rent and mortgage costs slowed from 0.91% YoY to 0.85%. In short, whichever way the data is sliced, July saw further disinflation progress. Even the one spot of notable inflation resilience in the consumption basket is now showing signs of disinflation progress. Granted, shelter inflation remained elevated at 5.7% YoY in July, but this was down from the 6.2% reading seen in June. This is a notable move in the right direction for a component where disinflation progress had appeared to stall in the first half of the year, a point confirmed by shorter-run momentum measures – shelter inflation also ticked down from 5.0% to 3.8% on a 3mma. annualised basis.
That said, we think it remains a high bar for the Governing Council to deliver 50bps of easing at any point in 2024. The BoC’s shift in focus to a broader examination of economic conditions, and in particular economic slack, suggests to us that this would require signs of a hard stop in growth, or a rapid unwind in the labour market. Despite our longstanding bearishness on the Canadian economy, neither of these looks likely to us at present.
With this in mind, we continue to see 25bp rate cuts as the base case for every BoC through to the end of the year a view also shared by markets, which now have a rate cut priced for each of the BoC’s three remaining meetings. Where we are at odds with market pricing is regarding USDCAD, which continues to flirt with 1.36 having barely budged following today’s data print. These levels look cheap in our eyes, though supported for now by aggressive Fed easing expectations and a recent rally in equities, a dynamic that looks unsustainable to us.
We continue to expect the pair to retrace higher, perhaps as early as this week, with FOMC meeting minutes and commentary from Jackson Hole both notable risk events.
Underlying inflation measures continue to cool, suggesting that rate cuts should be the base case at every BoC meeting through to year-end
Author:
Nick Rees, FX Market Analyst