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.
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“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.
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.
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 this week, the Bank of Canada itself will release its Business Outlook Survey, which Shenfeld says will give a clearer indication of how businesses expect the economy to evolve. He says 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.
If business leaders say they’re looking to ease the pace of pay hikes going forward, that should give the Bank of Canada confidence that wages won’t threaten to refuel inflation, Shenfeld says.
RBC expects that the outlook surveys will show “further improvement” on the items the Bank of Canada is watching closely, including corporate pricing behaviour, inflation expectations and the balance between supply and demand in the economy.
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