The Bank of Canada is scheduled to meet on July 24, and economists are increasingly confident that interest rates will be cut. This is also reflected in interest rate derivatives, which now show a 93% chance of a rate cut.
The consumer price index slowed to 2.7% from 2.9%, with core numbers also slowing. The figures show that the previous month’s upside surprise in inflation was just a blip in a broader trend of lower inflation as demand in the economy remains under pressure, according to CIBC.
They noted that there is a significant deflationary tailwind coming through housing and that rents slowed to +0.4% m/m and fell slightly to 8.8% y/y.
“As population growth slows due to government restrictions on mortgage rates, and more people move into the homeownership market as interest rates fall, rents are expected to continue to slow. Soon, the combination of fading national income and a gradual slowdown in rents means that shelter will begin to add material downward pressure to inflation,” CIBC economists wrote.
“On the surface, the demand-driven portion of inflation appears to be fading, with only a few pockets of inflation remaining above target. In our view, the BoC can take comfort in gradually moving away from its meeting-by-meeting, data-driven strategy and working toward something close to automation, trusting its forecasts that have been more accurate over the past year. The economy clearly needs to ease interest rates to ensure a soft landing, with future headwinds such as large mortgage rollovers and population growth likely to meet its needs. With headline inflation back in target territory and the BoC survey showing that business inflation expectations are trending lower, any concerns about the risks of inflation rising or staying above target are not warranted.”