There is no consensus among some of Canada's leading economists as to what the Bank of Canada will do when it decides on rates on July 12
Canada’s consumer price index (CPI) slowed to 3.4% year-over-year in May according to new figures this week from Statistics Canada – but what does that mean for interest rates?
The slower pace for the core inflation measure followed a 4.4% rise in April and was the smallest increase for two years, largely due to a 12% decline in energy prices.
But do leading economists believe that the stats will be enough to convince the Bank of Canada (BoC) that they can return to pausing rates for now?
“The month-over-month variation (+0.4%) is more indicative of the remaining inflation than the year-over-year variation due to the inflationary spike of May 2022,” CPA Canada’s chief economist David-Alexandre Brassard told Wealth Professional. “The pressure on prices is coming from service industries: strong service consumption is driving demand and constrained labour is impairing supply.”
He added that while there is better news for the headline rate of inflation, some parts of the story are less favourable such as food inflation at 8.3 % in May 2023 and increasing by 0.8 % since April 2023, an unsustainable growth rate.
On interest rates, Brassard cannot call it.
“It remains a coin toss whether the Bank of Canada will implement an additional hike in July,” he concluded.
Big banks’ opinions
Among some of Canada’s largest financial institutions there is no consensus, except agreement that inflation remains too high despite the better-than-expected data.
TD Economics managing director and senior economist Leslie Preston believes that there will be another rate hike on July 12, noting that the BoC was probably expecting core inflation to ease as supply chain issues improve.
“Governor Macklem may have a Bon Jovi earworm, humming, ‘whoa, we're half way there’” Preston wrote in a client note. “But there is still a ways to go to get inflation all the way back to 2%. And the bank would rather not be "livin' on a prayer" and is likely to take rates another quarter point higher in July to ensure demand, and hence price pressures cool further.”
RBC Economics’ team are in tune with TD, stating:
“Absent a large downside surprise from [labour market, GDP, and business outlook] data releases, we continue to expect the bank to hike the overnight rate by another 25 bp in July, before stepping back the sideline for the rest of this year.”
However, CIBC’s Andrew Grantham and Katherine Judge believe Governor Macklem will announce a summer break for rates, despite the hotter-than-acceptable inflation.
“However, the tamer core readings suggest that policymakers may be able to wait a little longer rather than following up June's hike with another move as early as July, and we therefore continue to expect policymakers to wait until September to deliver a final 25bp hike,” they conclude.
BMO’s Benjamin Reitzes, managing director, Canadian Rates, & Macro Strategist, Fixed Income Strategy, says that incoming data releases in the next two weeks may not be enough to change policy.
“The odds of a July rate hike might be slightly lower now, but if the rest of the data hold up over the next 2 weeks, a hike still looks likely,” he said in a commentary.
Finally, to Scotiabank’s Derek Holt who says the data is key and references strong US data that could signal a hike by the Fed, although does not believe this will necessarily influence the BoC.
“The evidence today supports a Fed hike in July, but the BoC’s decision to hike in June while the Fed whiffed gave the Canadian central bank a bit of breathing room,” he said.
