Economists say BoC could cut interest rates again in July if inflation keeps cooling

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OTTAWA — Economists expect inflation to slow further in May, which would be welcome progress for the Bank of Canada after it cut its key lending rate for the first time in four years.

Tuesday's report from Statistics Canada will provide the first reading on inflation after the Bank of Canada cut interest rates by a quarter of a percentage point on June 5, bringing the benchmark interest rate to 4.75 per cent. Economists say the new data could pave the way for another cut in July.

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BMO and TD expect Canada's annual inflation rate to slow to 2.6 and 2.5 per cent, respectively, down slightly from 2.7 per cent in April.

“It looks to be a fairly quiet month for inflation. I would say at this point, less news is good news,” said Douglas Porter, chief economist at BMO.

The Bank of Canada's decision to cut interest rates marks a major turning point in the central bank's battle against inflation, which peaked at 8.1 per cent in mid-2022.

It was also the first G7 central bank to cut interest rates, although it was quickly followed by the European Central Bank, which cut its interest rate by a quarter of a percentage point this month as well.

After the interest rate announcement, Governor Tiff Macklem said the Bank of Canada has more confidence that inflation is close to its 2 per cent target, citing various indicators that price pressures are easing.

Economists say incoming inflation data will significantly influence the pace of future interest rate cuts.

Looking ahead to the next rate announcement on July 24, TD Economics Director James Orlando said the next two inflation reports could point the way for another rate cut.

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“This will open the door to the possibility that the Bank of Canada decides to return to lowering interest rates,” Orlando said.

Porter agrees, noting that it may take “a bad reading, either this month or next month to prevent the Bank of Canada from cutting.”

Last week, the Bank of Canada published a summary of its deliberations on its June 5 interest rate decision, which revealed discussion about waiting longer to cut interest rates before ultimately deciding to go ahead with the cuts.

“While they recognized the risk that progress would stall – as happened in the US – there was consensus that with four consecutive months of decline in core inflation and indicators pointing to continued downward momentum, there was sufficient progress to justify the first cut in inflation.” “Interest rate,” the summary said.

The summary confirmed the central bank's cautious approach and that it plans to make decisions on future interest rates one by one.

The Bank of Canada has been particularly encouraged by the recent slowdown in core measures of inflation, which measure underlying price pressures and help the central bank track where inflation might head next.

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For consumers, slower inflation means smaller price increases while shopping, including at the grocery store.

In April, grocery prices rose at a modest pace of 1.4 percent annually, a significant decline from the rate of food price inflation that consumers once experienced.

“Grocery prices are still very high. There's no doubt about that. But they've actually stopped going up overall, so grocery has actually gone from being a big challenge to inflation to being a helping hand,” Porter said.

“I expect it will be a quiet source of help in May.”

This report by The Canadian Press was first published June 23, 2024.

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