Bank of Canada Rate Cut In July Less Likely, But Can’t Be Ruled Out: BMO

Canadian inflation is demonstrating it can be a lot stickier than the central bank expected. Last week’s CPI report showed annual growth accelerated, reversing some of the Bank of Canada (BoC) progress on taming inflation. The move sharply lowered the odds of the BoC making another cut later this month, but there’s still a chance, according to BMO. The bank notes that plenty of data will be released before the end-of-month rate announcement. While they have yet to change their expectations, they say it’s too early to dismiss the possibility it can happen. 

Canadian Inflation Is Heading In The Wrong Direction For Cuts

Canadian inflation is heading in the opposite direction needed to cut interest rates. Annual growth of CPI accelerated 0.3 points to 2.9% in May, just shy of the 3% upper tolerance band. The central bank’s target rate is 2%, so heading in this direction marks an erosion in progress. Headline CPI is notoriously volatile, so the BoC will look to the more stable Core CPI measures when this happens.

Core CPI eliminates the most volatile measures, helping to provide clarity on whether the move is broad-based. Unfortunately, the BoC-preferred measure also showed abrupt acceleration for both the trim and median measures. Both averaged just 0.1% per month over the first four months of 2024, respectively. In May, they suddenly jumped to 0.3%—a rate high enough to push Core CPI out of the tolerable inflation range if it persists, even for just a short period. 

“That’s not a disaster, but also provides the Bank with exactly zero additional confidence that inflation will head back to target over time,” explained Benjamin Reitzes, BMO’s Canadian Rates & Macro Strategist.  

Canadian Economy Still In Excess Supply, CPI Jump May Be Noise

Despite the inflation jump, the bank notes the greater erosion of demand drivers hasn’t changed much. Topping his list was the wide output gap, which implies excess supply. The BoC has mentioned this issue multiple times. It’s a major precursor for downward pressure on inflation.  

Erosion in the labor market makes a sudden demand surge to consume the excess supply unlikely. The bank points to the 23k jobs lost in the latest employment report, and the drop of 32k job vacancies. The BoC has repeatedly noted that inflation can return to target without the unemployment rate rising further. However, the rate climbing further confirms a loosening labor market, which provides deflationary pressure. 

Bank of Canada Has Plenty of Data Ahead of Next Rate Decision

The next BoC rate decision falls at the end of the month. This provides plenty of time (and data) for the picture to change, with another CPI report scheduled first. In addition, BMO also notes that employment and the Business Outlook Survey land before the meeting. Those will provide further insight into whether monetary policy is too easy, restrictive, or just right. 

“The surprisingly strong May inflation reading sharply lowered the odds of back-to-back Bank of Canada rate cuts, but doesn’t change the bigger picture,” warns Reitzes. 

He adds, “The economy continues to have excess capacity (even with the solid April GDP) which, coupled with increasing labour market slack, points to ongoing disinflationary pressure in Canada.” 

Despite seeing the potential for a cut this month, the bank has yet to change its official outlook. They reiterated their call, expecting the next rate cuts in September and December, each trimming 25 basis points from the overnight rate. 

Also working against a July rate cut is the timing of the most recent one, occurring right after the measures in the latest report. The latest CPI report covers May, a month before the BoC cut the overnight rate. That cut is expected to boost consumption and thus inflation, throwing gasoline onto a fire already burning hotter than they expected. After the “transitory” fiasco, the central bank will likely embrace an overly restrictive policy instead of the risk of over-easing. The bar for another round of cuts, without a clear picture of falling demand and inflation moderation, is very high. 

8 Comments

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  • Reply
    Omar 7 days ago

    Data isn’t in charge. The government’s borrowing is, and they’re spending like a drunken sailor on pay day.

  • Reply
    RW 7 days ago

    Tiff was appointed as Freeland’s stooge. He’s not making data dependent decisions, because unlike the US—the Bank of Canada isn’t independent. It’s unclear why anyone pretends its currency is anything like the US.

    • Reply
      Mortgage Guy 7 days ago

      Never forget the time Punwasi was called to Parliament, and he used the Bank of Canada’s own research to show Tiff was lying, who then changed the whole BOC narrative the next day.

      Tiff essentially proved he was lying to Parliament. He’s about the scummiest person out there, and he depends on people not understanding how its policy works.

  • Reply
    Mortgage Guy 7 days ago

    When it comes to mortgage rates we’re already seeing the effects of falling yields. The rate cuts will only impact a small segment of (mostly) investors who had their capital pinched on the climb.

    Don’t see a big boost to (real estate) demand from any rate cuts before it hits a 2-handle.

  • Reply
    Nazrul 7 days ago

    Do not cut rate. inflation is on the parade, it’s advancing everyday. Government is one eyed animal. I suppose these dont go Grocery even. If they use to go for groceries they would know the inflation situation everyday some groceries items getting pricey even couple of tens percent. It’s ridiculous to see rates cut.

  • Reply
    Mike 7 days ago

    David Rosenberg: Bank of Canada has nothing to fret about despite CPI hysteria
    The story beneath the surface still remains one of acute disinflation.

    No sticky inflation
    Let’s also remember that shelter commands a dominant 29 per cent share of the CPI, and this area spiked 0.4 per cent month over month and is up 6.4 per cent on a year-over-year basis. Mortgage interest is up 23 per cent year over year, and property taxes are pressing against five per cent, which is the fastest pace in more than 30 years.

    Home insurance has also jumped 9.3 per cent year over year, one of the highest rates of increase over the past two decades. From our perspective, debt-service costs, insurance premiums and property taxes act as more of a drag on real household purchasing power than a true source of inflation, but these are included in the data series.

    The bigger picture is that for ex-shelter costs, inflation is running at 1.5 per cent year over year and that has basically been the case all year long — it was 2.8 per cent this time in 2023 and 7.8 per cent in May 2022. Not to mention that it’s below the 2.1 per cent year-over-year trend just prior to the pandemic breakout in early 2020 (when the policy rate was 1.75 per cent, not 4.75 per cent).

  • Reply
    mike 7 days ago

    There is something that must be understood, and it just doesn’t concern the Bank of Canada, but all central banks. There are some prices (health, education, various measures of shelter, property taxes and insurance) that authorities really have little or no control over. In the Canadian context, the year-over-year trends across a gamut of items that actually move with the economic cycle are either deflating or close to flattening out: recreation: 1.3 per cent; motor vehicles: 0.7 per cent; housing maintenance/repairs: 0.7 per cent; housing replacement costs: minus 0.8 per cent; furniture: minus 1.9 per cent; household operations: minus two per cent; appliances: minus 2.5 per cent; and clothing: minus three per cent.

  • Reply
    Dennis_K 7 days ago

    Not being a finance or economics person, so I’m likely not understanding something, but why do interest rates ‘need’ to decline anyway? Isn’t the BoC’s mandate, as stipulated in the Bank of Canada Act, to manage inflation? Which it failed (or is failing) at?

    And inflation itself was once defined on BD as a ‘non-productive increase in the price of assets’, which to me, is another way of saying ‘greed’?

    Sooo ….. why are we considering lowering them? To stimulate (more) spending based on debt, despite our public debt at all-time highs (federal and provincial), and personal debt also very high (at least for the working class, i.e. the lower income quintiles)?

    I remember my first mortage in 2001, on a one-bedroom condo just west of Toronto; it was 6.48%, and that was the best one I could get. Then five years later upon renewal, I got 4.8% and was over-the-moon happy about it. And people are complaining about ‘affordability’ at today’s rates of 4.6 to 4.8% (5 year fixed)? And this is the time frame the CMHC has used as their ‘benchmark’ year (i.e. 2003) for calculating affordability, based on their June 2022 Estimating Supply Gaps report (and December 2023 Technical Paper Companion).

    Looking in conjunction with the National Bank of Canada Housing Affordability Monitor for Q1 2024, isn’t this a clear indication that housing prices (including rents) are clearly out of whack of median incomes, and need to drop by at least 50%?

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