The Bank of Canada will get one final read of inflation figures this week before it has to make its next interest rate decision, with some economists predicting a return to cooling will fuel hopes for another cut.
Statistics Canada is set to release its consumer price index (CPI) figures for June on Tuesday.
The Bank of Canada will be watching the updated inflation figures closely, particularly after a surprise uptick in price pressures the month before.
Inflation accelerated to 2.9 per cent annually in May, a move that surprised most economists who had expected CPI would continue to follow the cooling trends seen through much of 2024.
Tiff Macklem, the central bank’s governor, said then that Canadians can expect to see more interest rate cuts as long as inflation continues to cool according to the Bank of Canada’s forecasts.
Avery Shenfeld, chief economist at CIBC, tells Global News that he believes May’s inflation uptick will be an outlier rather than the start of a reacceleration in price growth.
“We’re hoping that May’s significant increase was a bit of a one-off,” he says.
“The economy does seem to be cooling. There are more workers out there looking for jobs. That tends to promote slower inflation, and that’s what we expect to see in June.”
Economists at Royal Bank of Canada are similarly expecting a return to easing price pressures.
Annual inflation is expected to slow to 2.7 per cent in the month amid slowing energy price hikes and further cooling at the grocery store, according to an outlook from RBC’s Nathan Janzen and Abbey Xu.
Will the Bank of Canada cut again?
Both CIBC and RBC are expecting that a drop in inflation will set up the Bank of Canada to deliver back-to-back rate cuts at its next decision on July 24.
Shenfeld says the central bank will be watching its preferred measures of core inflation, which also accelerated in May, for signs of renewed cooling. If monetary policymakers see that, it “leaves the door open for them to cut rates again this month.”
In the “big picture,” Shenfeld says that inflation is still running below the Bank of Canada’s latest forecasts released in April. Elsewhere, economic growth continues to hold barely positive and the rising unemployment rate suggests the once-tight labour market continues to slacken.
If May’s inflation surprise indeed ends up a blip on the central bank’s radar, Shenfeld says there are enough signs pointing to inflation coming down in the months ahead that Macklem and his peers can be confident that they can ease borrowing costs without risking progress to-date in taming price pressures.
“Those are all very good reasons for the Bank of Canada to try to find opportunities to bring some relief on the interest rate front,” he says.
Elsewhere on Monday, the Bank of Canada itself released its Business Outlook Survey (BOS), which indicates how businesses expect the economy to evolve.
Shenfeld said heading into the release that the key input to watch here will be wage growth, which is one area of the labour force survey that had remained hot amid signs of cooling elsewhere in the economy.
The BOS showed the average expectations for wage growth have “declined significantly” for the coming year. Businesses no longer feel as much need to hike payrolls to keep pace with the rising cost of living or to meet market wage standards, the Bank of Canada said in the report.
“On balance, firms no longer see a need for higher wages to attract or retain workers,” the central bank said.
Labour shortages are also no longer high on businesses’ lists of concerns, but “few firms plan to reduce headcounts,” the report notes.
More on Money
Taken together, businesses indicate that they continue to see a tough road ahead amid high costs and borrowing rates as well as declines in consumer spending, particularly for discretionary goods. But fewer respondents to the survey said they’re expecting a recession in the coming year.
Price normalization continued with fewer firms planning abnormally large or frequent price hikes in the year ahead. Businesses’ expectations for inflation over the next 12 months also fell into the central bank’s one-to-three per cent target range in this latest survey.
“The data should help reinforce that interest rates no longer need to be as high as they are to get inflation sustainably under control,” Janzen wrote in an RBC note to clients on Monday.
He reiterated that Tuesday’s inflation figures will have a greater bearing on the Bank of Canada’s final decision at next week’s meeting.
“But absent a significant upside surprise, the (Bank of Canada) looks on track to cut interest rates again,” Janzen wrote.
CIBC, TD Bank and BMO economists similarly said in notes Monday that the BOS results set up conditions for another cut, with June inflation data likely holding the final say.
As of Monday, Reuters reports that financial markets see a 73 per cent chance of another 25 basis point cut at the July 24 interest rate announcement.
Demands for government intervention in Air Canada labour talks could negatively affect airline competition in Canada, the CEO of travel company Transat AT Inc. said.
“The extension of such an extraordinary intervention to Air Canada would be an undeniable competitive advantage to the detriment of other Canadian airlines,” Annick Guérard told analysts on an earnings conference call on Thursday.
“The time and urgency is now. It is time to restore healthy competition in Canada,” she added.
Air Canada has asked the federal government to be ready to intervene and request arbitration as early as this weekend to avoid disruptions.
Comments on the potential Air Canada pilot strike or lock out came as Transat reported third-quarter financial results.
Guérard recalled Transat’s labour negotiations with its flight attendants earlier this year, which the company said it handled without asking for government intervention.
The airline’s 2,100 flight attendants voted 99 per cent in favour of a strike mandate and twice rejected tentative deals before approving a new collective agreement in late February.
As the collective agreement for Air Transat pilots ends in June next year, Guérard anticipates similar pressure to increase overall wages as seen in Air Canada’s negotiations, but reckons it will come out “as a win, win, win deal.”
“The pilots are preparing on their side, we are preparing on our side and we’re confident that we’re going to come up with a reasonable deal,” she told analysts when asked about the upcoming negotiations.
The parent company of Air Transat reported it lost $39.9 million or $1.03 per diluted share in its quarter ended July 31. The result compared with a profit of $57.3 million or $1.49 per diluted share a year earlier.
Revenue totalled $736.2 million, down from $746.3 million in the same quarter last year.
On an adjusted basis, Transat says it lost $1.10 per share in its latest quarter compared with an adjusted profit of $1.10 per share a year earlier.
It attributed reduced revenues to lower airline unit revenues, competition, industry-wide overcapacity and economic uncertainty.
Air Transat is also among the airlines facing challenges related to the recall of Pratt & Whitney turbofan jet engines for inspection and repair.
The recall has so far grounded six aircraft, Guérard said on the call.
“We have agreed to financial compensation for grounded aircraft during the 2023-2024 period,” she said. “Alongside this financial compensation, Pratt & Whitney will provide us with two additional spare engines, which we intend to monetize through a sell and lease back transaction.”
Looking ahead, the CEO said she expects consumer demand to remain somewhat uncertain amid high interest rates.
“We are currently seeing ongoing pricing pressure extending into the winter season,” she added. Air Transat is not planning on adding additional aircraft next year but anticipates stability.
“(2025) for us will be much more stable than 2024 in terms of fleet movements and operation, and this will definitely have a positive effect on cost and customer satisfaction as well,” the CEO told analysts.
“We are more and more moving away from all the disruption that we had to go through early in 2024,” she added.
This report by The Canadian Press was first published Sept. 12, 2024.
