April's headline inflation dropped, but core prices exceeded expectations
Bank of Canada policymakers expressed concern over the persistence of underlying inflation during their June 4 meeting, citing ongoing global trade disruptions and uncertainty, according to a summary of deliberations released Tuesday.
The Globe and Mail reported that the governing council maintained its benchmark interest rate at 2.75%, choosing to observe how recent developments, including tariffs imposed by the United States, would affect both Canadian and global economies.
“Underlying inflationary pressures could persist for an extended period as consumers and businesses adapt to the rewiring of global trade,” the minutes stated. Despite acknowledging possible downward price pressures, council members focused on how trade policy changes might lead to more prolonged inflation.
Canada’s annual inflation rate dropped to 1.7% in April, partially due to tax changes. However, the bank’s preferred core measures—excluding volatile components—indicated that inflation remained above the 1% to 3% target range. When taxes were excluded, inflation was reported at 2.3%, which was above economists’ expectations.
Businesses have reported intentions to pass on increased costs caused by supply chain disruptions, while consumer surveys revealed expectations for higher prices in the future. “Members agreed that cost increases from trade disruptions may be playing a role in inflation in goods prices, but the direct impact from retaliatory tariffs was not yet evident,” the summary noted.
Uncertainty limits scope for immediate rate changes
Although a rate cut was considered, policymakers opted to wait for more clarity on how the tariff dispute would evolve. The summary emphasized that the pass-through of input costs to final consumer prices remains difficult to track, further complicating monetary policy decisions.
Since June 2024, the Bank has reduced interest rates by a total of 225 basis points, supported by inflation dipping below the 2% threshold. However, the central bank warned that the current inflation firmness could delay further easing.
If the recent firmness in underlying inflation were to persist, it would be more difficult to cut the policy rate, the summary noted. On the other hand, if economic weakness persists and cost pressures ease, a rate cut could be necessary in the future.
The Bank of Canada reaffirmed its commitment to closely monitor evolving inflationary pressures and the interplay of opposing forces in the economy before taking further action.
