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Industry News #Featured articles
Globe and Mail: Inflation Eases in June, Prompting A Policy Rate Cut Next Week
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Globe and Mail: Inflation Eases in June, Prompting A Policy Rate Cut Next Week
The Globe and Mail recently reported that the Bank of Canada might be gearing up for a policy rate cut as soon as July 24th as June’s CPI inflation came lower than Bay Street’s expectations. A significant slowdown surprised economists, raising hopes for a BoC cut next week. To make it digestible for our readers, we have curated a simplified version of the Globe’s reports alongside economists’ forecast for next week’s policy announcement, honing in on potential consequences for mortgage rates, consumer spending, and the broader Canadian economy.
- CPI eased from 2.9% in May to 2.67% in June.
- Money markets significantly increased the likelihood of a policy rate cut next week.
- When paired with economists ‘ policy rate forecasts, lower fixed and variable mortgage rates are on the horizon.
The Globe states that money markets predict a 92% chance of the Bank of Canada cutting interest rates by a quarter-point (0.25%) on July 24, up from 83% before the June inflation data was released. Three more quarter-point (0.75%) cuts are expected by the end of the year, potentially bringing the bank’s overnight rate to 4%.
The Canadian dollar dropped slightly in response to the data, while the bond market remained relatively stable. The U.S. retail sales report also influenced US and Canadian bond yields. Economic reports, including a weak Canadian jobs report, have increased expectations of a rate cut by the BoC.
Canada’s annual inflation rate decreased to 2.67% in June, slightly lower than expected, mainly due to softer gas prices. Core inflation measures also saw a slight decline. The consumer price index was down 0.1% month-over-month, the first decrease since December.
The Bank of Canada’s overnight rate is currently 4.75%, with bond futures market implied rates fluctuating constantly. The probability of future rate moves is primarily downwards, with minimal chances of no change or hikes. The expected target rates were slightly higher before the data was released, with a similar probability of rate moves.
David Rosenberg, Rosenberg Research
The recent data shows that Canada’s CPI slightly decreased in June, lowering the year-over-year trend to 2.7%. The Bank of Canada does not have a strict 2% inflation target but a range of 1% to 3%, which they are comfortably within. More rate cuts are expected in the future. The CPIX measure excludes volatile (excluding mortgage interest costs) components trending year-over-year to 1.9%. Excluding shelter reduces the CPI from 2% a year ago to 1.25% today. The BoC will likely continue with 200 bps of rate cuts as they are still far from reaching its “neutral” policy rate.
Royce Mendes, Desjardins Securities
In June, Canada’s inflation was 2.7% for Q2, below the Bank of Canada’s 2% target. Core inflation, excluding food and energy, increased by 0.2% in June, with a twelve-month pace of 2.9%. Despite some acceleration in 3-month annualized rates, the central bank will likely cut rates on July 24th due to tepid consumer price growth, declines in inflation expectations, and subdued survey responses about the Canadian economy’s outlook.
Stephen Brown, Capital Economics
The Bank of Canada’s core prices rose above target in June, possibly leading to another interest rate cut next week. However, the Business Outlook Survey indicates disinflationary pressure. CPIX and headline prices rose by just 0.1%. The 3-month annualized change in CPI-trim and CPI-median rose to 2.9% in June, potentially prompting a pause from the Bank next week. However, concerns about downside risks from a tight policy stance are growing, with the unemployment rate at 6.4% and easing wage pressures.
James Orlando, TD Economics
Today’s CPI report showed mixed results, with headline inflation improving in June. Core inflation has steadily increased over the past 3 months, suggesting inflation will likely remain towards the higher end of the BoC’s target range of 1% to 3% in the upcoming months, driven by increases in shelter prices, dining out, health expenses, and household operations. The upcoming BoC rate announcement may see back-to-back cuts due to a weakening job market and slowing wage growth. The BoC will likely continue with a cutting cycle, reducing rates consistently throughout this year and the next.
Matthieu Arseneau and Alexandra Ducharme, National Bank Financial
June’s inflation rate remains high at 2.9% (3-month annualized), posing a challenge to reach the 2.0% target. However, recent trends are not alarming to the Bank of Canada. Core inflation has been steady at 2.2% over the past 6 months, slightly above the target, with only a few components exceeding the target rate. The main issue lies in the shelter component, particularly mortgage interest; inflation drops to 1.9% when excluded. There are no signs of inflation picking up soon, especially with a weakening labour market and reports of overstaffing in industries. The data suggests the Canadian economy needs support, and a rate cut in July is still anticipated.
Derek Holt, Scotiabank
The Bank of Canada’s core inflation gauges have been consistently high, indicating a rebound from an earlier soft patch. Despite this, the BoC may still cut interest rates next week, which could be risky given global supply chain shock and trade dependency. Both trimmed mean and weighted median CPI were up 2.9% last month, showing higher underlying core inflation. Arguments for continued easing include the BoC’s confidence in achieving 2% inflation and Governor Macklem’s dovish stance.
Katherine Judge, CIBC
The June inflation data met expectations, with headline CPI at 2.7% year-over-year. However, core inflation measures like CPI-trim and CPI-median showed a slight decrease in monthly advances. Other key core measures also improved, indicating a broader disinflation trend due to economic pressure. This sets the stage for a potential interest rate cut by the Bank of Canada at the upcoming meeting.
Benjamin Reitzes, BMO
The June inflation report shows consumers are spending less on recreation and clothing, with a significant 11.1% drop in travel tours. Rent increased slightly by 0.1%, and food prices rose by 0.6% for the second month. The June CPI indicates a slow move towards the 2% inflation target, leading to a predicted 25 bps rate cut at the next Bank of Canada meeting.
Claire Fan, RBC
June’s CPI showed a slight decrease after a surprising increase in May. The Bank of Canada’s preferred CPI trim and median decreased monthly, while the “supercore” measure remained slightly higher. The recent Business Outlook Survey by the BoC indicated normalization in key areas such as pricing behaviour, future inflation expectations, and wage growth. As a result, it is anticipated that the BoC will continue to ease monetary policy to support the weak economy, with another rate cut expected at the upcoming July meeting.
The Bank of Canada’s decision on July 24th regarding potential rate cuts remains uncertain. While most experts predict a cut, some advocate for a wait-and-see approach to assess the full impact of the June rate cut and gather further economic data. Canadians will likely experience a financial shift regardless of the Bank’s decision.
Any shift or expectations of downward pressure on the BoC and Fed will continue to drop bond yields, prompting lenders to reprice their fixed mortgage rates in line with lower bond yields. A rate cut could immediately relieve variable-rate mortgages, priced against their lenders’ prime rate, and encourage some consumers to spend more. However, long-term effects like increased debt accumulation, renewal payment shock and the potential for renewed inflation must be considered. The coming weeks will be pivotal as Canadians await the Bank’s decision and its subsequent impact on their mortgage payments, household budgets, mortgage strategy and financial plans.
If you’re a borrower trying to gauge the market for your upcoming mortgage renewal or home purchase, check out nesto’s mortgage rates forecast, updated frequently with market changes, to guide our clients on what Canadian economists and industry leaders expect for the upcoming months and years. When you’re ready to move forward to secure your best mortgage, reach out to nesto’s mortgage experts to put together your most suitable mortgage strategy.
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