Retail pullback and soft CPI could give Bank of Canada room to ease rates despite policy caution
A long-awaited rate cut from the Bank of Canada may finally be on the table — but only if inflation holds steady.
The Bank of Canada may have a chance to cut interest rates this summer if inflation shows signs of remaining subdued, according to Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategy.
BNN Bloomberg reports that Reitzes said if upcoming consumer price index (CPI) data indicate inflation is “well contained,” policymakers might “take that opportunity” to lower the benchmark rate, though “at the moment it is not doing so.”
The Bank will receive two CPI readings before its next policy announcement on July 30.
The May CPI, expected Tuesday from Statistics Canada, will be the first of those.
As per financial data reported by BNN Bloomberg, economists expect inflation ticked up to 1.8 percent year-over-year in May, from 1.7 percent in April.
However, Reitzes projects a slowdown to 1.5 percent due to weaker shelter inflation and a smaller jump in gas prices compared with last year.
CIBC Capital Markets also expects inflationary pressures to remain modest.
Senior economist Katherine Judge attributed May’s anticipated rise to food prices and core goods impacted by tariffs. She noted that while food inflation may climb, rent inflation is likely to decelerate after April’s unexpected increase.
According to Judge, Statistics Canada’s updates to its CPI basket will be reflected in the release but are not expected to meaningfully affect the headline figure.
Bank of Canada Governor Tiff Macklem described the current inflation picture as “complicated” in a recent speech to the St. John’s Board of Trade.
He said core inflation measures now exceed three percent, though he warned of “potentially some distortion” that could be “exaggerating” the pace of price increases.
Alternative core measures, he added, show lower figures, raising questions about how persistent the pressures really are.
Macklem emphasized the central bank’s focus on CPI readings that exclude tax changes.
As per BNN Bloomberg, April’s tax-adjusted inflation stood at 2.3 percent — higher than expected.
The impact of the federal GST holiday and the end of the consumer carbon tax have added volatility to recent inflation data.
Macklem said these effects will fade from year-over-year comparisons after 12 months.
Tariff-related uncertainty also remains a central concern.
According to Macklem, the recent “firmness” in inflation could be an early sign of the US-Canada trade war’s influence. Although businesses may face higher costs due to tariffs, it is unclear how quickly they will pass those on to consumers.
Reitzes noted that food inflation, one of the areas affected by Canada’s counter-tariffs, could also reflect earlier Canadian dollar weakness.
On the consumer side, retail activity continues to show signs of softening.
Statistics Canada’s advance estimate, reported by the Financial Post, indicated retail sales contracted 1.1 percent in May, following a 0.3 percent rise in April largely driven by automobiles.
Core sales, which exclude vehicles and gasoline, grew just 0.1 percent in April, while 36 percent of retailers reported experiencing impacts from the tariff war.
CIBC economist Andrew Grantham, cited by the Financial Post, said that May’s decline signals the economy “is heading for a stall in Q2,” especially given the “sluggish” performance outside auto sales.
Capital Economics’ Bradley Saunders noted that the dip may reflect consumers making early purchases ahead of tariff hikes, though recent confidence gains might limit the downside.
Still, Saunders projects a one percent annualised economic contraction over the second half of the year.
Both CIBC and Capital Economics anticipate further rate cuts. CIBC forecasts two more reductions of 25 basis points this year, bringing the policy rate to 2.25 percent.
Saunders added that “despite Macklem’s hawkish comments,” policymakers are likely to prioritise downside risks.
Alberta Central chief economist Charles St-Arnaud acknowledged that May’s projected retail dip points to weaker consumer activity, but he sees some resilience.
As per the Financial Post, inflation-adjusted retail sales per person rose in April, suggesting consumption is no longer solely driven by population growth.
St-Arnaud does not expect retail data to sway the Bank’s decision, instead pointing to inflation as the more decisive factor.
National Bank of Canada economist Daren King said core retail sales provide a clearer view of consumer health. He highlighted declines across several categories in April and suggested that May wildfires in Western Canada may have further weighed on sales.
He added that the federal tax cut announced this summer could help buffer the slowdown, though some mortgage holders still face interest rate shocks.
