Finally ready for a rate cut?

Inflation slows to 2.7%, leading economists to believe even more that the Bank of Canada could act as soon as June

Inflation continued to decelerate in April, to 2.7%, its lowest level in three years, which further increases the likelihood of a first interest rate cut from the Bank of Canada on June 5.

“The problem of generalized inflation in Canada has been resolved,” decided the economists of the National Bank, after the publication of the Consumer Price Index (CPI) for April.

After rising to 2.9% in March, the CPI slowed further in April, to 2.7% year over year, despite a significant increase in gasoline prices. This is a general slowdown in inflation, according to Statistics Canada, mainly attributable to the prices of food, services and durable goods.

The overall inflation rate is within the Bank of Canada’s target range of 2% to 3% for the fourth consecutive month. Core inflation measures, stripped of the most volatile elements and closely monitored by monetary authorities, are also moving in the right direction.

The only downside is that the price of housing continues to push the inflation rate upwards. Without housing, whose rising prices reflect the shortage and not the overheating of the economy, inflation would be only 1.2%.

“I don’t see what else the Bank of Canada could want as a signal before lowering rates,” said David-Alexandre Brassard, chief economist at CPA Canada.

Like most economists, David-Alexandre Brassard leans towards a first rate cut in June, even if the Bank of Canada may want to be cautious and wait for its other decision scheduled for July. “Will the cost of waiting a few more weeks [jusqu’en juillet] could be too big? », he asks.

A first rate cut in June would send a positive signal to homebuilders at the start of their busiest season, the economist believes.

Waiting any longer risks inflicting unnecessary damage on the economy, believes National Bank economist Matthieu Arseneau. “It is high time that the Bank of Canada gave the economy some breathing space,” he said.

That said, he thinks the Bank of Canada could very well wait a few more weeks, two more inflation reports, until July, when the release of its Monetary Policy Report is planned at the same time as the rate decision.

“It’s just a few more weeks, but as long as the work is done, there is no reason not to lower the rates,” says Matthieu Arseneau.

Limited declines

Just a month ago, Bank of Canada Governor Tiff Macklem said it would be better to wait “a few months” to ensure the slowdown in inflation is sustainable.

The Bank of Canada’s key rate has been at 5% since July 2023, its highest level in 20 years. The economy has slowed significantly in recent months and the unemployment rate has increased.

While most economists agree that the time has come to lower rates in Canada, the pace and extent of the cuts remain difficult to predict.

The rate cut in the United States, imminent not so long ago, seems to be fading, which could slow down rate cuts in Canada, believes the chief economist of CPA Canada.

The Bank of Canada will probably lower its key rate before the American Federal Reserve, but it will want to ensure that the gap is not too large, estimates David-Alexandre Brassard.

Higher interest rates in the United States than in Canada would weaken the Canadian dollar, with the risk of fueling Canadian inflation with imported goods, such as oil.