Canadian Inflation Surges in May, Pressuring Interest Rate Cut Speculations
In an unexpected development, the annual inflation rate in Canada for May has witnessed a surge to 2.9%, primarily propelled by a notable rise in service prices. This unforeseen acceleration complicates the outlook for anticipated interest rate cuts in July. The increase was more pronounced when compared to the analysts’ prediction, which had anticipated a cool down to 2.6% from April’s 2.7%. Moreover, on a month-over-month basis, the consumer price index escalated by 0.6%, surpassing the forecasted rise of 0.3%.
Market Analysis
Simon Harvey, Monex Europe and Monex Canada’s Head of FX Analysis, expressed that despite May’s inflation data stirring doubts over the Bank of Canada’s (BoC) expected series of rate cuts, the finer details of the report are less concerning. He pointed out that the increase is largely attributable to seasonal and temporary factors, suggesting that this inflation spike does not deviate from the previously observed disinflationary trend.
Harwy anticipates a rate cut from the BoC in July, followed by an additional two cuts within the year.
Karl Schamotta, Chief Market Strategist at Corpay, noted that the halt in the moderation of the Bank of Canada’s preferred inflation measures sets the stage for a quarterly pace of interest rate easing ahead. Although another inflation report will be released before the BoC’s July meeting, Schamotta believes a cautious approach will delay the next rate cut to September, coinciding with the Federal Reserve’s expected rate reduction timeline.
Robert Both, Canadian Macro Strategist at TD Securities, mentioned that the rise seems to be driven by a rebound in food prices and an increase in discretionary travel service components. However, he maintains that this report is unlikely to significantly alter the Bank of Canada’s course, which is seemingly set towards a rate cut at its next meeting.
Doug Porter, Chief Economist at BMO Capital Markets, pointed out that this is the first inflation report of 2024 to present a disappointing perspective. While the report is not alarming, it certainly presents higher figures than anticipated and appears to be quite broad-based. Porter remarks, “This definitely reduces the chances that the Bank of Canada will cut in July.” However, he also mentions that another inflation reading will be available before the BoC’s July meeting, which leaves some room for possible adjustments to plans. Positively, he notes that all core inflation measures remained below 3%, but acknowledged the data as a “step in the wrong direction”.
As Canada grapples with unexpected inflation dynamics, the country now anticipates the Bank of Canada’s next move with keen interest, assessing how it will navigate the challenge of balancing growth with price stability.
