Olivia Cross, North America Economist, Capital Economics
The fourth consecutive 0.1% m/m average increase in the Bank of Canada’s preferred core price measures in April will give the Bank confidence that the further easing in core inflation is being sustained. That progress means there is a strong possibility of a June rate cut, although the continued resilience of the labour market means the Bank may be equally comfortable waiting until the July meeting, allowing it to observe two more months of inflation data.
The 0.2% m/m seasonally adjusted rise in the headline CPI index was smaller than we had expected, and brought the headline rate back down to 2.7%. That softer increase was helped by a 0.2% m/m fall in food prices, which offset some of the rise in gasoline prices. Recreation prices also fell by 0.2% m/m, while the March rebound in clothing prices was short lived, with prices unchanged in April. The continued source of strength remains shelter prices, which rose by a stronger 0.5% m/m, although more favourable base effects meant that the annual rate edged down to 6.4%.
The muted monthly gains pulled the annual rates of CPI-trim and CPI-median down to 2.9% and 2.6%, respectively, and the average three-month annualised rate was just 1.6%. That said, the six-month annualised rate was still 2.4%, so it may still be too soon for the Bank to conclude that its job is done. Accordingly, despite the continued progress, the Bank of Canada may hold off on cutting interest rates in June, in order to confirm that lower core inflation will be sustained in the next two CPI releases ahead of the July meeting. Nonetheless, the data today further reinforce our view that markets are underestimating the degree of policy loosening that is likely over the next 12 months.
Royce Mendes, managing director and head of macro strategy at Desjardins Securities
Canadians look likely to get a small dose of rate relief in the coming weeks. With headline inflation decelerating to 2.7% in April from 2.9% in March and core measures also moving in the right direction, Canadian central bankers should have the evidence they need to begin easing monetary policy.
Statistics Canada even went as far as to call it a broad based deceleration. Excluding food and energy, prices were up a cool 0.1% in seasonally-adjusted terms, enough to take the annual rate of that core metric down to 2.7% from 2.9% March.
The Bank of Canada’s preferred measures of core inflation also showed more progress towards normalization. Both the core median and trimmed mean indexes rose just 0.14% in April. The average of the three-month annualized rates accelerated to 1.6% from 1.4%, but only because an even weaker monthly print fell out of the calculation. The three-month annualized rates remain well below the central bank’s 2% inflation target and are running even slower than what the consensus had penciled in. That’s a signal that underlying price pressures should continue to pull headline inflation lower in the months to come.
Yields are down across the Government of Canada yield curve and the exchange rate is also weaker, although it still seems like a bit of an underreaction to what was a very encouraging data release. While the market still seems somewhat hesitant to fully commit to a rate cut in June, we see the latest inflation data as enough for the Bank of Canada to begin a gradual easing cycle at its next policy announcement.