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Economists predict that the June rate will decline as inflation continues to moderate

February’s lower-than-expected inflation reading bolstered confidence that the Bank of Canada could begin the first rate cut in June.

The market’s odds of a quarterly cut meeting the Bank’s overnight target rose slightly to 75% following today’s report from Statistics Canada showing inflation continued to moderate to 2.8% from 2.9% in January.

This reading equates to the lowest inflation rate since the start of 2021, before the price hike that led to a sharp increase in headline inflation of 8.1% in the summer of 2022.

The Bank of Canada’s preferred measures of core inflation, which excludes food and energy prices, also fell more than expected, with CPI-median falling to 3.1% (from 3.3% in January) and CPI-trim falling to 3.2% from 3.4 %.

Once again, housing costs continued to rise and remain ahead of inflation, its pace rising to +6.5% for the year from +2% in January. Rent inflation rose to 8.2% year-on-year (from 7.8%) while housing interest costs eased slightly to 26.3% from 27.4%.

A rate cut may come sooner, or it may come later

Although the consensus among economists points to June for the Bank of Canada to cut the first rate, others warn of risks that may affect this timeline.

As Bank of Canada Governor Tiff Macklem said earlier, the Bank of Canada wants to see continued inflation before it is ready to consider cutting interest rates.

“…you don’t want to let them down until you’re sure…that you’re on the right track. [to the 2% target]and that’s exactly where we are now,” he said last month.

And while the January and February inflation reports are encouraging, they are not enough to satisfy the BoC.

“Two months is nowhere near a continuing trend, although it is the beginning of a trend,” real estate broker and former investment banker Ryan Sims wrote in an email to subscribers. “If we see this decrease gradually from 3.35%, down to 3.15%, down to 3.02%, down to 2.85%, etc., etc., then Tiff and Co. they would have reason to believe that it is sustainable.

In a new forecast released today, TD Economics said the “war is not yet won” on inflation, and therefore expects the Bank to hold off on interest rates until its July meeting.

At the same time, BMO’s Douglas Porter noted that the central bank’s earlier moves could not be reversed.

“April still seems too early to shrug off rate cuts, although it can’t be completely ruled out if the Business Outlook Survey shows more. [inflation] progress,” he wrote. “At least to [the April 10 meeting]for the Bank to open the door to lowering rates.”

BoC risks waiting too long before cutting rates

Just as the Bank of Canada threatens to cut rates in the near future, which could increase demand — particularly demand for real estate — and put upward pressure on inflation, experts say a prolonged interest rate environment could lead to a more significant recession.

“Today’s data shows the cooling of the Canadian economy in the last six quarters, when the transfer of monetary policy took place,” wrote National Bank economists Matthieu Arseneau and Alexandra Ducharme.

Because of the lag monetary policy has on the economy, they say today’s “constrained” level of interest rates is likely to continue to put downward pressure on inflation in the coming months.

“Since the Bank of Canada’s recent communication has focused on strengthening monetary policy rather than signs of weak growth, there is a risk that it will do more damage to the economy by maintaining overly restrictive monetary policy,” they added.

Oxford Economics, which has previously suggested that the Canadian economy is already in a mild recession, reiterated that belief today.

“Unlike the Bank of Canada, which expects a soft landing, we believe Canada is in the midst of a mild recession that will increase the economic slowdown,” he said. “In line with our forecast for lower global oil and food prices this year, this will help CPI inflation reach its 2% target by late 2024.

Still, the Bank of Canada expects it will take longer for inflation to return to its 2% target, forecasting a return to 2025 in its latest Monetary Policy Report from January.


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