Canadian CPI inflation slows, markets pricing in BoE rate cut next week

According to Statistics Canada today, headline year-on-year inflation for June rose +2.7%, easing from +2.9% in May and was marginally south of economists’ expectations of +2.8%, The report was also softer than the Bank of Canada’s (BoC) inflation forecast for the first half of this year.

Dovish rate repricing

The immediate aftermath of the latest release saw the Canadian dollar (CAD) head southbound and we observed a modest dovish shift in rate pricing; swaps traders are now pricing in nearly a 90% probability of a rate cut for next week’s meeting (compared to 82% before the release of the inflation numbers).

The report added that the slowdown in consumer prices was primarily due to cooling gasoline prices, which rose +0.4% versus May’s reading of +5.6%.

Monthly headline inflation fell -0.1% from +0.6% in May. The monthly number was lower than the market’s median estimate of 0.0% and was the first fall since late 2023. Lower prices in travel tours and gasoline contributed to the decline. 

In terms of BoC’s preferred core measures – the CPI median and CPI trim – the former came in slightly higher than May’s upwardly revised print of +2.7%, while the latter matched May’s value of +2.9%. The average value is now +2.75%, down from +2.8% in May.

Excluding food and energy components, the CPI BoC core reported that consumer prices increased by +1.9% in June from May’s reading of +1.8%. Between May and June, the CPI BoC core matched the headline release and fell -0.1% from +0.6% in May.

Back-to-back rate cuts

You will recall that the BoC cut rates by 25 basis points at its June meeting, bringing the Overnight Policy Rate to 4.75%.

BoC Governor Tiff Macklem commented, ‘If inflation continues to ease, and our confidence that inflation is headed sustainably to the 2% target continues to increase, it is reasonable to expect further cuts to our policy interest rate. But we are taking our interest rate decisions one meeting at a time’.

However, while the accompanying rate statement noted that the Overnight Policy rate no longer needed to be restrictive, it did highlight that there are still upside risks to inflation and that the ‘Governing Council is closely watching the evolution of core inflation and remains particularly focused on the balance between demand and supply in the economy, inflation expectations, wage growth, and corporate pricing behaviour’.

In terms of tier-1 macros, June’s labour data was meaningfully weak. Change in employment revealed a marginal fall of -1,400, and unemployment rose to 6.4% in June, its highest rate since the beginning of 2022. This, coupled with slowing GDP growth, inflation remaining within the BoC’s inflation target range between 1% and 3% for six months now, and limited tier-1 data on the docket ahead of next week’s rate decision, it is widely expected that the central bank will cut rates next week. Alongside this, traders will welcome updated economic forecasts and the rate statement.