Intelligent Investment
Hotter Inflation Throws Cold Water On Back-to-Back Rate Cuts
Canada Monthly Market Commentary
June 27, 2024 2 Minute Read
Canada became the first G7 country to lower its policy interest rate in early June and signaled the start of its monetary policy easing cycle. While the Bank of Canada did consider delaying its first interest rate cut in four years, the central bank ultimately decided that the preceding run of encouraging inflation results had warranted a 25 bps cut to the policy rate to 4.75%. The Bank of Canada also explicitly noted that it would be “reasonable to expect further cuts”, but on the condition that inflation continues to ease and stay on track towards the 2% target.
However, the most recent inflation report has shown a reacceleration in both the headline and average core measures to 2.9% and 2.8%, respectively, from 2.7% the month prior. There is another inflation report scheduled before the next Bank of Canada meeting on July 24th, but this reversal of the downward trend in inflation has considerably tempered market expectations for another policy rate cut next month. Market implied probabilities for a July interest rate cut have fallen to 46% from the 65% priced in just prior to the inflation report. Meanwhile, market odds remain high for decreases in September and December.
Going forward, bumpier inflation results will likely mean a less predictable path for interest rates. But whether the Bank of Canada cuts next in July or sometime later, the Canadian economy is expected to remain on its monetary policy easing cycle over the next couple of years. The major Canadian banks economic groups currently project a median policy interest rate of 3.00% by the end of 2025. Accordingly, economic growth is forecast to rebound from the near-zero levels of GDP growth seen throughout most of 2023. This stronger economic outlook will set the foundation for more favourable property market fundamentals and increased real estate investment activity over the coming years.
Economic Highlights:
- Headline inflation rose to 2.9% in May 2024 and the core measures CPI-Trim and CPI-Median also increased to 2.9% and 2.8%, respectively.
- Advanced estimates indicate retail sales likely fell 0.6% in May 2024, reversing most of the 0.7% gain from April 2024.
- Employment rose by 26,700 jobs in May 2024 and the unemployment rate edged higher to 6.2%.
Viewpoints:
- Bank of Canada cuts rates to 4.75%, signals more to come
- Bank of Canada considered holding off interest rate cuts until July, summary says
- How market and economist views of future BoC rate cuts have shifted following Tuesday’s surprise jump in inflation
- Canada poised for long-term growth amid rate cut cycle: economist
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