Today’s inflation numbers haven’t settled the debate in money markets on whether the Bank of Canada will start cutting interest rates next month. But they have modestly increased the odds, according to market pricing.
Canada’s annual inflation rate slowed to a three-year low of 2.7% in April, matching expectations, and down from 2.9% in March. Month on month, the consumer price index rose 0.5% in April, less than a forecast of 0.6% gain.
The central bank’s preferred measures of core inflation also eased. CPI-median slowed for the fourth straight month to 2.6% from 2.9% in March, while CPI-trim decreased to 2.9% from 3.2%.
Implied probabilities in swaps markets now suggest about a 53% chance the Bank of Canada will cut its key lending rate at its next policy meeting June 5. Immediately prior to the data, those odds were hovering at about 40%. The odds had risen to above 70 per cent at the start of this month, coinciding with an unexpected weak U.S. employment report, before later declining.
Odds of a cut at the July meeting are now up to 83 per cent, from 75 per cent prior to the 830 am ET inflation report.
The swaps data suggest market participants are unusually split on their views on an exact date for when rate cuts will begin. But there remains strong conviction that easier monetary policy will arrive this summer. And just over 50 basis points of cuts are fully priced into markets by the end of this year.
Action in other markets suggest today’s inflation numbers were a bit softer than traders were positioned for. The Canadian dollar lost about a quarter of a US cent, trading at 73.19 cents US at last check. The Canada two-year bond yield slipped to 4.214% from 4.2631%.
The following table details how swaps markets are pricing in further moves in the Bank of Canada overnight rate, according to Refinitiv Eikon data minutes after the inflation figures were released. The current Bank of Canada overnight rate is 5 per cent. While the bank moves in quarter point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
And here’s how markets were pricing in monetary policy changes just prior to the data being released:
Here’s how economists and market strategists are reacting in written commentaries this morning:
Andrew Grantham, senior economist, CIBC Economics
Today’s data should have provided the all clear on the inflation front that the Bank of Canada needed to start cutting interest rates in June. While headline CPI was in line with consensus expectations, rising 0.5% on the month for an annual rate of 2.7% (down from 2.9%), we saw continued softness in most core measures of inflation including CPI-Trim and CPI-median. ... Mortgage interest costs continued to put the greatest upward pressure on the year-over-year rate of headline CPI, with telephone services and internet the most downward pressure. At the time of the April interest rate decision, the Bank of Canada Governor stated that policymakers were encouraged by recent subdued inflation readings, but needed those to persist for longer before cutting interest rates. Since then we have received two more months of data pointing to tame underlying inflation, for a total of four in a row, and as such there doesn’t appear to be a good reason not to cut interest rates at the next meeting in June. We continue to forecast a first reduction at that meeting, with a total of four 25bp cuts before the end of the year.
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. ...
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.
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.
Douglas Porter, chief economist, BMO Capital Markets
Chalk another one up for the doves, with four consecutive tame CPI readings to start 2024. There is really no debate that monetary policy is tight in Canada, and that it is now consistently weighing on underlying inflation. The key question for the BoC is whether inflation has tamed sufficiently to now start reducing the degree of restrictiveness. We believe that the door is open for a BoC rate cut, and we have been leaning to June move for the past six months. But it remains a close call, and when the Bank does eventually move, it will be gradual with a highly patient Fed acting as a limiter on how far and how fast Canadian rates can fall.
Derek Holt, vice-president and head of capital markets economics, Scotiabank
I still think the BoC should wait past June. Our best odds remain on a Q3 cut with July the most probable and 75bps of cuts this year. July pricing is worth paying on the belief that it’s unlikely that the BoC would cut back-to-back in both June and July ...
Why wait? For one, Governor Macklem said in carefully developed written testimony just on May 2nd that they would be evaluating developments over coming “months” of additional evidence. Note the plural form of his reference. June 5th was only one month ahead of his comment and one month of additional evidence on inflation and some other metrics like GDP. To cut in June would be a communications misstep that would add to the BoC’s hall of fame of communications missteps.
If Macklem cuts on June 5th after saying he wished to wait “months” then the rates complex would probably pile into more cuts for the year as a whole. With the Fed signalling it’s in no rush and the BoC already 50bps below with a weaker currency than the Fed is facing, the BoC would risk unmooring CAD and offering a little more upside to what I view as ongoing arguments for viewing full cycle inflation risk as being higher in Canada than the US.
Furthermore, the BoC will have much more evidence by the July 24th decision and not much more by the June 5th meeting other than GDP. ... Overall, however, I’m not budging from my narrative that we need a lot more inflation data to test potentially temporary influences.
Leslie Preston, managing director and senior economist, TD Economics
April was another month of good news on Canadian inflation. The BoC’s preferred inflation gauges moved into the 1-3% target range for the first time in nearly three years. However, at 2.8% it is still close to the top of the BoC’s range, and we expect the bank will want to see a bit more confirmation before taking rates lower and lean towards a July cut.
However, markets have found today’s inflation number a bit more reassuring, and have increased the odds of a June cut to better than 50-50. But June or July, Canadians can be increasingly confident that alongside lower inflation, interest rates are headed lower soon.
Abbey Xu, economist, Royal Bank of Canada
The breadth of inflationary pressures narrowed again in April, with the proportion of the CPI basket experiencing growth exceeding 3% decreasing to 34% from 38% in March. ... April’s inflation readings largely met expectations, but with underlying details (including further slowing in the BoC’s preferred ‘core’ measures) pointing to further reduction in inflationary pressures. The Bank of Canada is as concerned about where inflation will go in the future as where it is right now, but a persistently softer economic backdrop in Canada (declining per-capita GDP and rising unemployment rate) increases the odds that price growth will continue to slow. The case for interest rate cuts from the Bank of Canada continues to build, with today’s report in line with our own base case for a first cut in June.
Matthieu Arseneau and Ben-Isaac Meiga, economists with National Bank Financial
Weak inflation since the beginning of 2024 reflects the cooling of the Canadian economy over the past seven quarters of monetary policy transmission, during which GDP per capita has been on a downward trend. Canada’s economic weakness is also reflected in a rapidly weakening labor market, with the unemployment rate up 1.3 percentage points since its trough in 2022. As a result, private sector wages have slowed sharply and are now rising at a pace similar to pre-pandemic levels, with no sign of a near-term rebound as small businesses are now much more concerned about sales than hiring. With this morning’s data confirming that Canada’s widespread inflation problem has been solved, it’s high time for the Bank of Canada to give the economy some oxygen, because by maintaining such a restrictive monetary policy, it risks inflicting unnecessary damage on the economy.
Charles St-Arnaud, chief economist, Alberta Central credit union
Most importantly, the momentum of BoC’s core measures was 1.6% on average. This is the third time consecutive month that that the momentum in the BoC’s core measure of inflation is below 2.5%. The inflation momentum suggests that the underlying inflation dynamic has slowed to a pace consistent with the BoC’s target.
There is nothing in today’s report that would prevent the BoC to cut June. With all measures of core inflation below 3%, the momentum in the BoC’s preferred measures below 2.5% and the breadth if the inflationary pressures in line with the historical average, all the conditions we had identified to support a rate cut have been met and support a cut at the June meeting. If the BoC doesn’t cut, it would be a matter of extreme caution in our view, rather than suggesting that upside risks to inflation remain a concern. Nevertheless, whether they cut in June or July has very little impact on the outlook. What matters more will be the speed and the number of cuts we will see over the next year.
Simon Harvey, head of FX analysis, Monex Canada (foreign exchange firm)
It’s time for the BoC to begin cutting rates. Having hailed the disinflation progress in recent months back at April’s policy meeting, Governor Macklem highlighted that the Bank needs to see evidence that this can be sustained before policymakers could confidently begin to cut rates. Since then, almost all data points have supported an imminent commencement to the Bank’s easing cycle. This includes the two intermeeting inflation reports, with both showing that disinflation progress in Canada has remained undisturbed for more than a quarter. In fact, April’s anomalous payrolls report provides the sole exception to this pattern, but even then we would recommend viewing that data in the context of an unemployment rate that returned to levels last seen in 2017.
As a result, given the evolution of the Canadian inflation data, and the broader context of the economy operating with excess supply, we think the Bank’s confidence threshold to cut rates has been reached and continue to look for a rate cut at the next meeting on June 5th. Moreover, with the totality of the data suggesting that the Canadian economy remains cyclically weak, with that spilling over into firms’ hiring and pricing behaviours, we expect the Bank to cut rates again on September 4th, leaving them to cut rates twice before the Fed begins to move.
On the whole, we think the sustained disinflationary progress in the Canadian data since April leaves the Bank little choice but to cut rates in two weeks’ time. While slightly stronger growth at the start of the year and healthy April job gains suggest the BoC could throw caution to the wind and await two further inflation reports to cut rates in July without triggering any negative economic consequences, we think this poses a communications problem seeing as Bank staff have conditioned a rate cut on sustained disinflation progress that has now been delivered. Although short-term interest rate markets are becoming sympathetic with our base case, they continue to underprice the extent to which we think the BoC will cut rates this year.
David-Alexandre Brassard, chief economist, Chartered Professional Accountants of Canada
With inflation under 3% since the start of 2024 and trending down amidst rising gas prices in April, the higher interest rates seem to be working in bringing down inflation. The housing-related inflationary pressures have truly dissociated from the overall economy and only reflect that housing demand is significantly outstripping supply. With the economy and labour market growing slower than our population, this downward trend in inflation should be sufficient for the Bank of Canada to start cutting interest rates in June.
Bryan Yu, chief economist, Central 1 credit union
Canadian price growth slowed to the lowest level in more than two years in April, suggesting Canada’s struggle with inflation is near complete. ... April inflation patterns should be seen as constructive for a Bank of Canada rate cut as soon as the June meeting. Headline inflation starts in the quarter below the Bank’s Q2 forecast of 2.9 per cent and its preferred measures of core inflation were all below three per cent in April. The core-common and median measures came in at 2.6 per cent, with the trim at 2.9 per cent. Meanwhile, CPI excluding shelter sank to 1.2 per cent. The one measure of mild concern was a rise in the 3-month average growth in trend at 2.3 per cent but was partly an effect of price declines in January. Nevertheless, tame inflation, slack in the labour market, and downsides risks to the economy from a mortgage renewal wave should provide enough evidence to cut, albeit limited by a more tempered pace of cuts south of the border.