Canada’s annual rate of inflation stayed at 1.7 per cent in May, but economists say that might not be enough for the Bank of Canada to cut interest rates at its meeting next month.
The Consumer Price Index — a broad-based measure of inflation — was 1.7 per cent higher in May than it was a year earlier, Statistics Canada said. That’s exactly where it was in April.
While the headline number wasn’t particularly high, the Bank of Canada will likely want more data before it starts cutting interest rates again, said BMO chief economist Douglas Porter.
“The data over the next five weeks will ultimately drive the decision, but the odds of a July cut are lower now on the so-so CPI,” Porter wrote after the May numbers were released.
Gasoline prices dropped 15.5 per cent year-over-year, thanks largely to the removal of the carbon tax, but rose 1.9 per cent month-over-month.
Rents rose 4.5 per cent from a year ago, a slower pace than the 5.2 per cent increase seen in April. Ontario was the biggest contributor to the slowdown in rent growth, Statistics Canada said, with rents in this province just 3 per cent higher than a year ago. That’s down from 5.4 per cent in April.
Michael Davenport, senior economist at Oxford Economics, agreed that the Bank likely won’t start cutting rates again. While the economy might be faltering, the full impact of the trade war with the U.S. likely makes the Bank leery of acting too quickly, Davenport said.
“There’s still over a month before the next Bank of Canada decision, but we expect it will continue to hold rates in neutral territory as it tries to manage pervasive uncertainty and balance the opposing forces on inflation from the trade war,” Davenport said.
Still, argued TD’s Andrew Hencic, the trade war is holding the Canadian economy back, which should also help keep inflation under control. That, he said, gives the Bank room to start cutting again.
“As has been the case this year, the outlook is heavily dependent on how trade negotiations evolve, but we believe that the soft economic backdrop should give the BoC space to deliver two more cuts this year,” Hencic said.
A report from National Bank economists Taylor Schleich, Ethan Currie and Noah Black suggested that the May inflation report probably didn’t tip the balance much in either direction for the Bank of Canada.
“We wouldn’t say this report significantly leans toward a cut or a hold when looking to next month’s decision,” the National Bank economists wrote in a report after Tuesday’s data was released.
There’s still plenty of data due to come in before the bank’s next interest rate decision, scheduled to come July 30, National Bank noted, including Friday’s release of official gross domestic product data for April, along with preliminary estimates for May.
“Our baseline forecast involves a July cut but that’s very much a data dependent call. We’ll need to see more co-operation in the next month, via a softer June inflation report and/or continued weakness in the labour market,” National Bank wrote.
May’s CPI release is one of two inflation reports to arrive before the Bank of Canada’s next interest rate decision.
After cutting its key overnight lending rate from 5.0 per cent to 2.75 per cent in a series of seven straight drops in an attempt to boost the flagging economy, the Bank left the rate alone at its past two decision days.
