A Tuesday report showing a slowdown in inflation should be a relief for the Bank of Canada as it wrestles with high consumer prices, economists said, while warning that other hot economic data remains a concern for monetary policymakers.
Statistics Canada’s consumer price index report for May, released Tuesday, saw year-over-year inflation fall to 3.4 per cent – its lowest level since June 2021 and closer to the Bank of Canada’s target rate of two per cent, after coming in at 4.4 per cent in April.
“I’m sure the Bank of Canada has exhaled a little bit,” Sal Guatieri, director and senior economist at BMO financial group, said of the inflation figures.
“You’re basically double the inflation target, so we’re not all the way there yet, but things seem to be moving in the right direction.”
Despite some positive signs, Guatieri cautioned that there is a difficult path ahead when it comes getting inflation down to two per cent – something he doesn’t anticipate happening until late 2024, particularly as the broader economy has remained hot in the face of rate tightening efforts to date, with strength in the labour market and consumer spending.
“It will be a slower road going forward,” he said in a television interview. “The real concern for the Bank of Canada now is that the economy has slowed a bit, but not anywhere close to where it needs to be to ultimately ease inflation pressures.”
Pedro Antunes, chief economist at the Conference Board of Canada, told BNN Bloomberg the figure is “very good news” for the central bank, as economic data for 2023 so far has appeared generally resilient to the effects of interest rate hikes.
“Central bankers have been nervous about not so much the inflation numbers, but more so around the strength of the economy that we saw in the first quarter,” Antunes said in a television interview.
He said the rate increases of the past year do not appear to have dampened consumer behaviour enough, pointing to strong retail sales and a recent rebound in home prices, while inflation was brought down last month due to “external” factors like lower fuel prices.
“I think they’ll be very pleased on the inflation numbers but they’ll be concerned around the strength of that domestic economy,” Antunes added.
WHAT HAPPENS NEXT?
The inflation print may be welcome news as the Bank of Canada prepares for its July monetary policy decision, after unexpectedly hiking its central interest rate in June to 4.75 per cent.
Antunes said he thought the central bank could have held rates in June, and he expects elevated interest rates will continue to “erode” economic activity, though population growth and strong incomes will “continue to drive spending.”
He also anticipates that there will be a slowdown in the third and fourth quarters of the year as consumers deplete their savings.
Tuan Nguyen, economist with accounting and consultancy at RSM Canada, said the inflation print has lowered the probability of a July rate hike, but next month’s meeting will be a “live event” as policymakers debate the latest data.
“Together with the surprised decline in net employment released earlier this month, we are in favour of a pause in July should there be another fall—or weak growth—in job gains, which is due in two weeks,” he said in a written statement.
Even if the Bank of Canada pauses in July, Nguyen said Canadians should brace for the possibility of more rate hikes as the year continues, adding that it’s unlikely the central bank will lower rates in 2023.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
OTTAWA – Canada’s inflation rate fell to two per cent last month, finally hitting the Bank of Canada’s target after a tumultuous battle with skyrocketing price growth.
The annual inflation rate fell from 2.5 per cent in July to reach the lowest level since February 2021.
Statistics Canada’s consumer price index report on Tuesday attributed the slowdown in part to lower gasoline prices.
Clothing and footwear prices also decreased on a month-over-month basis, marking the first decline in the month of August since 1971 as retailers offered larger discounts to entice shoppers amid slowing demand.
The Bank of Canada’s preferred core measures of inflation, which strip out volatility in prices, also edged down in August.
The marked slowdown in price growth last month was steeper than the 2.1 per cent annual increase forecasters were expecting ahead of Tuesday’s release and will likely spark speculation of a larger interest rate cut next month from the Bank of Canada.
“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” wrote CIBC senior economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO, said Tuesday’s figures “tilt the scales” slightly in favour of more aggressive cuts, though he noted the Bank of Canada will have one more inflation reading before its October rate announcement.
“If we get another big downside surprise, calls for a 50 basis-point cut will only grow louder,” wrote Reitzes in a client note.
The central bank began rapidly hiking interest rates in March 2022 in response to runaway inflation, which peaked at a whopping 8.1 per cent that summer.
The central bank increased its key lending rate to five per cent and held it at that level until June 2024, when it delivered its first rate cut in four years.
A combination of recovered global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signalled that the central bank is ready to increase the size of its interest rate cuts, if inflation or the economy slow by more than expected.
Its key lending rate currently stands at 4.25 per cent.
CIBC is forecasting the central bank will cut its key rate by two percentage points between now and the middle of next year.
The U.S. Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
This report by The Canadian Press was first published Sept. 17, 2024.
FREDERICTON – New Brunswick‘s finance minister says the province recorded a surplus of $500.8 million for the fiscal year that ended in March.
Ernie Steeves says the amount — more than 10 times higher than the province’s original $40.3-million budget projection for the 2023-24 fiscal year — was largely the result of a strong economy and population growth.
The report of a big surplus comes as the province prepares for an election campaign, which will officially start on Thursday and end with a vote on Oct. 21.
Steeves says growth of the surplus was fed by revenue from the Harmonized Sales Tax and federal money, especially for health-care funding.
Progressive Conservative Premier Blaine Higgs has promised to reduce the HST by two percentage points to 13 per cent if the party is elected to govern next month.
Meanwhile, the province’s net debt, according to the audited consolidated financial statements, has dropped from $12.3 billion in 2022-23 to $11.8 billion in the most recent fiscal year.
Liberal critic René Legacy says having a stronger balance sheet does not eliminate issues in health care, housing and education.
This report by The Canadian Press was first published Sept. 16, 2024.
