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Inflation data ‘all clear’ for Bank of Canada interest rate cut in June, economists say

‘April’s data sent a loud and clear message that disinflation is here to stay’

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With inflation cooling to a three-year low in April, some economists are now all but guaranteeing that the first interest rate cut of the Bank of Canada‘s tightening cycle will come in June.

On Tuesday, Statistics Canada reported that Canada’s annual inflation rate fell to 2.7 per cent in April, down from 2.9 per cent a month prior.

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Andrew Grantham, executive director of economics at CIBC, said the data “provided the all clear” for the Bank of Canada to begin cutting rates.

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“At the time of the April interest rate decision, the Bank of Canada Governor stated that policymakers were encouraged by recent subdued inflation readings, but needed those to persist for longer before cutting interest rates,” he wrote in a note to clients.

“Since then we have received two more months of data pointing to tame underlying inflation, for a total of four in a row, and because of that we continue to forecast a first rate cut at the next meeting in June.”

Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, said Tuesday’s data should give the Bank of Canada more confidence that inflation is stable.

“A rate cut in June is not just possible; it’s becoming the main consideration,” he said.

Tu Nguyen, an economist with RSM Canada, said a June rate cut is now a “no-brainer.”

“As the economy dragged along and headline inflation fell in the 1-3 per cent range for the fourth month in a row, there is really no reason for the Bank of Canada to wait until July,” she said. “The Bank of Canada had wanted to see evidence of sustained disinflation, and April’s data sent a loud and clear message that disinflation is here to stay.”

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Douglas Porter, chief economist with the Bank of Montreal, said it’s more of what the “doctor ordered.”

“The real news was the main measures of core inflation all dipped below three per cent, or back within the (Bank of Canada)’s one per cent to three per cent zone of comfort,” he said.

“We believe that the door is open for a (Bank of Canada) rate cut, and we have been leaning to June move for the past six months. But it remains a close call, and when the Bank does eventually move, it will be gradual with a highly patient (U.S. Federal Reserve) acting as a limiter on how far and how fast Canadian rates can fall.”

Despite the good news in the data, shelter costs are still hurting Canadians, said Randall Bartlett, senior director of Canadian economics at Desjardins.

The Statistics Canada report found shelter prices are up 6.4 per cent year-over-year, with inflation excluding shelter slowing to just 1.2 per cent.

“High and rising shelter costs, combined with the recent increase in gasoline prices on the back of higher oil prices, continues to put strain on the household finances of Canadians,” he said.

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Leslie Preston, managing director and senior economist at TD Bank, is among the few economists expecting the first cut to come in July, arguing that inflation still remains a little high for comfort.

“We expect the bank will want to see a bit more confirmation before taking rates lower and lean towards a July cut,” he said.

“However, markets have found today’s inflation number a bit more reassuring, and have increased the odds of a June cut to better than 50-50.”

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Olivia Cross, North America economist at Capital Economics, believes June is on the table, but wouldn’t rule out the possibility that the central bank could push the decision to its following meeting in late July.

“That progress means there is a strong possibility of a June rate cut, although the continued resilience of the labour market means the bank may be equally comfortable waiting until the July meeting, allowing it to observe two more months of inflation data,” she wrote in a note.

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