The Bank of Canada is set to meet on July 24, and many economists are predicting a rate cut. This prediction is further supported by the fact that interest rate derivatives are now indicating a 93% chance of a rate cut. The recent release of the Canadian Consumer Price Index (CPI) showed a deceleration to 2.7% from 2.9%, with core numbers also slowing down.
According to analysts at CIBC, this data suggests that the previous month’s inflation increase was just a temporary blip in a larger trend of disinflation. The economy continues to face pressure as demand remains subdued. One of the main factors contributing to disinflation is the housing market, with rent increasing by only 0.4% month-on-month and 8.8% year-on-year. As population growth slows due to government restrictions and more people enter the housing market due to falling interest rates, rents are expected to continue decelerating.
CIBC economists predict that the combination of declining mortgage interest costs and a gradual slowdown in rent prices will start to exert downward pressure on inflation. They believe that the Bank of Canada can afford to move away from its previous strategy of making decisions based on each meeting and data release. Instead, they suggest that the Bank could rely more on its forecasts, which have proven to be accurate over the past year.
The current state of the economy indicates a need for interest rate relief to ensure a smooth landing in the face of future challenges such as large mortgage renewals and population growth. With headline inflation returning to the target range and surveys showing that inflation expectations among firms are decreasing, concerns about inflation exceeding the target are unwarranted.
Overall, the data suggests that the Bank of Canada may be inclined to implement a rate cut to support the economy and address current disinflationary pressures. By trusting in its forecasts and taking a more proactive approach, the Bank can help steer the economy towards a more stable path in the face of ongoing challenges.
