BoC to look for stronger signals before cutting rates as inflation holds steady

Canada’s annual inflation rate was unchanged in May, holding steady at 1.7% – but analysts expect the Bank of Canada will need more conclusive signs of a sustained slowdown before cutting interest rates.

Last month’s figures, revealed by Statistics Canada this morning, aligned with economists’ forecasts, but analysts see little chance of the central bank reducing its benchmark rate over the summer.

“The quick take on this overall result would be: Not bad, but should do better to convince the Bank to trim rates further,” Bank of Montreal (BMO) chief economist Doug Porter wrote in a note to clients. “The data over the next five weeks will ultimately drive the decision, but the odds of a July cut are lower now on the so-so CPI.”

Core inflation—an important metric for monetary policymakers—showed some modest easing. Both CPI-median and CPI-trim dipped slightly to 3.0% in May from 3.1% in April. On a month-over-month basis, the Consumer Price Index rose 0.6%, or 0.2% when adjusted for seasonality.

“Overall, the moderation in core measures is a step in the right direction for the Bank of Canada,” wrote Canadian Imperial Bank of Commerce (CIBC) economist Katherine Judge. “They will want that progress to be maintained in the next report in order to feel comfortable cutting in July.”

Shelter costs mixed, rent growth slows in Ontario

One of the most closely watched components of the CPI—housing—showed mixed trends. Shelter costs were up 3% year-over-year in May, a slight slowdown from April’s 3.4% pace. Rents also cooled somewhat, rising 4.5% annually in May compared to 5.2% in April.

Ontario played a key role in that moderation. Rent growth in the province dropped to 3% last month, down sharply from 5.4% the month before.

“The increased availability of rental units, coupled with slower population growth compared with spring of the previous year, contributed to the slowdown in rent price growth in May,” StatCan said. “Given the large weight of Ontario nationally, these effects alone were enough to offset faster price growth in seven other provinces.”

TD Bank senior economist Andrew Hencic echoed this, noting that structural issues in Ontario's housing market are expected to continue tempering rent increases in the coming months.

Energy, mortgage costs driver broader disinflation

Meanwhile, energy and mortgage-related costs offered further relief to consumers. The mortgage interest cost index fell for the 21st straight month, easing from 6.8% in April to 6.2% in May.

Gasoline prices declined 15.5% year over year in May, continuing a trend that saw an 18.1% drop the previous month. According to StatCan, the year-over-year decrease was largely driven by the federal government’s decision to eliminate the consumer carbon tax, along with associated provincial fees.

The overall CPI figures matched consensus estimates. CIBC Economics had projected an annual inflation rate of 1.7% for May. That marks a repeat of April’s reading, which had fallen from 2.3% in March—largely due to sliding energy prices and carbon tax changes.

The Bank of Canada is scheduled to meet for its next decision on interest rates on July 30.

Source: Canadian Mortgage Professional