By Max Sato
(MaceNews) – Sticky but easing inflation, rising unemployment and slower growth prospects have raised the possibility that the Bank of Canada’s policymakers will lower the short-term interest rate target next week, following up on their initial rate cut last month.
The CPI report for June released Tuesday showed the annual inflation rate eased back to 2.7%, mainly driven by lower gasoline prices, after unexpectedly rising to 2.9% in May from a three-year low of 2.7% hit in April. Durable goods prices fell at a faster pace in June as supply chains have improved and high interest rates are prompting consumers to delay big-ticket purchases. But while goods price markups remained tame, services costs ticked up.
It was the last key piece of data ahead of the bank’s policy decision on July 24, when Governing Council will discuss whether economic conditions will allow the bank to lower interest rates at this point after delivering its first rate cut since March 2020 in June. The bank is in the process of gradually unwinding the 10 rate hikes totaling 475 basis points that it conducted between March 2022 and July 2023.
Economists see a higher chance that the bank will trim its policy interest rate — the target for overnight lending rates — by another 25 basis points to 4.50% for a second straight time on July 24, to help cushion the impact of its earlier rapid credit tightening aimed at taming inflation.
The CPI data followed June jobs data released earlier this month that showed employment fell 1,400 in June, much weaker than a consensus call of a 21,300 gain, after rising 27,000 in May. The unemployment rate rose to an above-forecast 6.4% from 6.2%, up 1.3 percentage points since April 2023. One problem for the bank is that the year-on-year increase in average hourly wages accelerated to 5.4% in June from 5.1% in May.
“We have seen a bit of a mixed message on the inflation reports and price expectations since the prior BoC meeting, consistent with some underlying stickiness,” Douglas Porter, chief economist at BMO Financial Group, said. “But, importantly, the rise in the jobless rate and the soft survey results on the growth outlook suggest that the economic backdrop will eventually chill price pressures.”
“So, while the case for a follow-up rate cut is not airtight, it’s probably strong enough to prompt another move next week,” Porter said. BMO economists previously predicted the bank was likely to wait until its Sept. 4 meeting before cutting rates further.
James Orlando, senior economist at TD Economics, also believes that the CPI report, although it was a mixed bag, has increased the possibility of back-to-back rate cuts. “Whether or not it follows through with a slightly quicker pace of cuts next week, Canadians should expect rates to be steadily reduced over the rest of this year and next,” he wrote in a report.
Orlando noted that the three-month annualized pace of core inflation has now been rising for three straight months. “This infers that the annual pace of inflation should remain in the upper end of the BoC’s 1% to 3% range over the coming months,” he said.
Two of the BoC’s core inflation measures, based on the CPI report, showed the road to the bank’s 2% target remains bumpy. The year-on-year increase in the CPI trim stood at 2.9% in June, unchanged from May, when it rose from 2.8% in April while the annual rate of the CPI median eased slightly to 2.6% after rising to a revised 2.7% in May from 2.6% in April. Those measures strip out whatever is volatile at the time.
Among the data supporting a rate cut next week, the bank’s quarterly Business Outlook Survey released Monday showed sentiment among companies in Canada remains more pessimistic than average in April-June after improving slightly in the previous two quarters as continued weak demand and high borrowing costs have discouraged capacity expansion and also led to easing labor conditions and lower near-term inflation expectations among firms and consumers.
To predict the inflation path, officials are closely monitoring any shift in the inflation outlook among households and businesses.
“Firms’ expectations for inflation fell in June and are now in the Bank of Canada’s inflation-control range (between 1% to 3%),” the bank said. In the Business Outlook Survey, firms’ expectations for inflation over the next two years are roughly unchanged in the second quarter, at 3.0%, but recent Business Leaders’ Pulse results show monthly expectations for inflation one year ahead fell sharply in June to 2.9% after rising to 3.3% in April from March’s 3.1% and stayed at 3.3% in May.
In its quarterly survey of consumer expectations for April-June, the bank said the inflation outlook remains well above the bank’s 2% target but also pointed to a lower outlook in the near term.
“Consumers’ perceptions of inflation are unchanged from a quarter ago, but their expectations for inflation over the next 12 months have declined significantly (to 4.09% from 4.92% in the first quarter),” the bank said. Both measures have improved substantially in recent quarters, although they remain higher than they were before the pandemic.
Perceived financial stress “remains high,” and most consumers continue to report spending cuts and pessimism about future economic conditions, the bank said, but it added that homebuying intentions are “close to the historical average,” supported by strong plans among newcomers to purchase a home.
The latest GDP data showed the economy rose 0.3% on the month in April after no change in March, making a solid start to the April-June quarter. Statistics Canada’s early estimate for May is a 0.1% gain. In the first quarter, real GDP grew 0.4% on quarter, or an annualized 1.7%, below the consensus forecast of a 2.3% rise and the BoC’s April projection of 2.8%. The annualized growth rate in the previous quarter was revised down to a slight 0.1% from 1.0%.