Cooling of inflation in Canada in June makes interest rate cut next week increasingly likely

By Celebrity Mukherjee and Ismail Shakil

OTTAWA (Reuters) – Slower-than-expected consumer price inflation in Canada in June has boosted expectations that the Bank of Canada will deliver another interest rate cut next week, providing further relief to homeowners and indebted businesses.

Data on Tuesday showed that the annual inflation rate cooled slightly more than expected to 2.7 percent in June and that core inflation indicators closely watched by the BoC also declined slightly.

Analysts surveyed by Reuters had predicted a decline in the inflation rate from 2.9 percent in May to 2.8 percent.

The inflation index is the last key data point before the central bank's interest rate announcement, and Tuesday's figures led analysts and economists to almost certainly factor in another 25 basis point rate cut on July 24.

“June inflation data gave the Bank of Canada what it needed to cut rates at next week's meeting,” Katherine Judge, senior economist at CIBC Capital Markets, wrote in a note.

Royce Mendes, head of macro strategy at Desjardins Group, said the recent data “makes a strong case for an immediate continuation of the rate-cutting cycle.”

Financial markets increased their forecasts for a rate cut at the central bank's rate announcement on July 24 to almost 93% from 82% before the data was released.

On a month-on-month basis, the consumer price index fell 0.1 percent, against forecasts of no change. This was the first slowdown in the monthly inflation rate since December, data from Statistics Canada showed.

Tuesday's data showed that headline inflation was lower than the BoC's inflation forecast of 2.9% for the end of the first half of 2024.

The consumer price index (CPI) has remained below 3% since the beginning of the year and was within the target range of the central bank, whose aim is to keep inflation in the middle of its range.

Last month, the bank became the first G7 central bank to cut its borrowing costs by 25 basis points, after keeping them at levels more than two decades high for about a year.

Since then, weak GDP figures for April and rising unemployment in June have been signs that the economy is under pressure and further cuts are needed to avoid a recession.

The number of corporate bankruptcies has increased, many car loans are becoming insolvent and people can no longer repay their credit card debts.

A business survey conducted by the BoC on Monday found that firms are reluctant to invest in expansion or machinery as they expect demand to remain subdued next year.

“Today's consumer price index report, together with the weak second quarter business survey, the continued rise in the unemployment rate and the deepening economic slack, should give policymakers enough confidence … to cut the federal funds rate by 25 basis points to 4.5% on July 24,” said Benjamin Reitzes, managing director of BMO Capital Markets.

The Canadian dollar gave up gains following the release of the data and the loonie traded 0.07% lower against the US dollar at 1.3691 or 73.04 US cents.

Canada's main stock index opened with a gain of 0.26% at 22,810.07 points, boosted by hopes of an interest rate cut.

The yield on two-year government bonds fell by 0.9 basis points to 3.792 percent.

The average of two of the Bank of Canada's preferred measures of core inflation – CPI median and CPI trim – fell slightly to 2.75% in June from 2.80% in May.

The decline in headline inflation was largely due to a decline in gasoline prices, which rose 0.4 percent annually in June, compared with 5.6 percent in May. Excluding gasoline prices, the consumer price index rose 2.8 percent on an annual basis, Statscan said.

Some cooling in prices was offset by an increase in supermarket food prices and a smaller decline in mobile phone services in June.

Excluding food and energy, prices rose 2.9 percent in June, the same as in May.

Services prices rose 4.8 percent year-on-year in June, compared with a 4.6 percent increase in May, while goods inflation slowed to 0.3 percent from 1 percent.

(Reporting by Ismail Shakil and Promit Mukherjee; Editing by Chizu Nomiyama)