Economists are predicting a slight decrease in Tuesday’s inflation numbers, giving the central bank further room to cut its policy rate
Randall Bartlett, senior director of Canadian economics at Desjardins Group, expects Tuesday’s data will show annual inflation ticked down once again to 2.6 per cent in May, putting it on track for a return to two per cent by year-end.
CIBC Capital Markets economist Katherine Judge also expects to see a decrease in the CPI, with inflation dropping to 2.5 per cent year over year. Excluding mortgage interest rate costs, that drop is expected to be even bigger.
“If you exclude mortgage interest rate costs from CPI, it’s running much lower, and it has for several months,” she said. “It’s been running around two per cent, which is just a reason for the Bank of Canada to continue cutting.”
The question on everyone’s mind is what the inflation trend will mean for future rate cuts by the Bank of Canada.
On June 5, the Bank of Canada announced its first rate cut in nearly four years, bringing the policy rate down from five per cent to 4.75 per cent.
Despite Macklem’s words of caution, economists are already predicting multiple cuts in the four remaining policy rate announcements in 2024.
“We are assuming one 25-basis-point cut at each meeting this year,” Stephen Brown, an economist at Capital Economics Ltd., said. “Which will take the policy rate down to 3.75 per cent, from 4.75 per cent currently.”
Bartlett thinks the central bank also has room to cut next month, but may take a pause in September.
“Right now, we have pencilled in another cut in July, we think the Bank of Canada has the room to cut,” he said. “We think there will be a pause potentially in September, allowing the Bank of Canada to re-evaluate and also get a sense of direction from the other central banks, notably the Fed.”
While economists are confident that inflation will continue to cool, there are still risks that could disrupt this trend.
Another upside risk discussed by the central bank was wage pressures, with annual wage growth at four per cent. The combination of wage growth and poor productivity means labour costs continue to increase at an above-average pace, according to the Bank of Canada.
However, Judge said those pressures often lag the latest data.