Inflation data points to another rate cut, economists say

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June’s consumer price index inflation data should be a welcome sign for Canadians hoping for an interest rate cut next week, according to some of the country’s top economists.

Statistics Canada on Tuesday said inflation slowed to 2.7 per cent last month, a noticeable bounceback from the surprise 2.9 per cent increase in May.

The dip was largely due to a slowdown in gas prices, which climbed 0.4 per cent year over over compared to 5.6 per cent in May. Shelter prices also dropped during the month.

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After the scare in May, economists believe the Bank of Canada now has the green light to make another interest rate cut next week.

Here’s what they had to say:

‘Odds still favour’ a cut: Capital Economics

Stephen Brown, deputy chief North America economist at Capital Economics Ltd., said some core measures finished above target, but the Bank of Canada’s Business Outlook Survey, which pointed to further disinflationary pressure to come, makes it more likely Canadians will see a cut next week.

“We can’t completely rule out a pause from the (Bank of Canada) next week,” he said in a note.

“Our sense, however, is that the (central) bank is likely to be growing more concerned about the downside risks of its still tight policy stance. The unemployment rate jumped to 6.4 per cent in June and the Business Outlook Survey suggests that wage pressures have eased considerably, all of which should give the bank confidence that core inflation will continue to fall.”

Inflation slightly high, but cuts coming: RBC

Claire Fan, an economist at Royal Bank of Canada, agrees the Business Outlook Survey results should lead the Bank of Canada to an interest rate cut, even though the latest inflation figures may be slightly high.

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“Yesterday’s second-quarter release of the (Bank of Canada)’s Business Outlook Survey largely confirmed further normalizing in a few key areas that the central bank has deemed critical to future inflation trends, including firms’ pricing behaviour, their expectations for inflation in the future as well as wage growth,” she said in a note.

“All told, we expect the (Bank of Canada) will carry on with easing the monetary brakes on a weak economy, and follow up with another rate cut at its July meeting next week.”

‘What it needed’: CIBC

Katherine Judge, director and senior economist at CIBC Capital Markets, said June’s inflation data is what policymakers needed for them to cut interest rates next week, as the preferred measures of core inflation had improved from last month.

“This shows that the prior month’s upside surprise in inflation was just a blip in a broader trend of disinflation as demand in the economy remains under pressure, paving the way for a (Bank of Canada) cut next week,” she said in a note.

Shelter costs dropping, so will rates: RSM

Tu Nguyen, an economist at RSM Canada LLP, said shelter inflation is among the keys in this month’s data. As new condos arrive on the market, she said shelter costs — the most stubborn inflationary pressure — are also coming down and making room for more cuts.

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“We believe that the Bank of Canada should cut the policy rate by 25 basis points next week, bring the policy rate to 4.5 per cent,” she said on LinkedIn.

“Inflation is on track to reach 2.5 per cent this year and return to two per cent next year. Keeping the policy rate unnecessarily restrictive risks a policy error and raises recession odds.”

Back on track toward 2% inflation: Dejardins

Royce Mendes, managing director and head of macro strategy at Fédération des caisses Desjardins du Québec, also believes the CPI numbers pave the way for another interest rate cut.

“A return to tepid consumer price growth likely seals the deal for a follow-up 25 (basis point) rate cut from the Bank of Canada next week,” he said in a note.

“Along with significant declines in inflation expectations and a further normalization in corporate pricing behaviour, the latest inflation data build a strong case for continuing the rate-cutting cycle without delay. That’s particularly true in light of the subdued survey responses from consumers and businesses about the outlook for the Canadian economy.”

• Email: bcousins@postmedia.com

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