Canada’s inflation rate falls to 2.7% in April, driving up odds of June rate cut

Canada’s annual inflation rate fell to 2.7% in April amid a broad-based slowdown in price growth, boosting expectations of an interest rate cut next month.

Statistics Canada said the slowdown from 2.9%in March was led by food prices, services and durable goods.

Tuesday’s consumer price index report bears good news for the Bank of Canada, which has been looking for a sustained decline in inflation toward its 2% target.

And for economists who have been expecting the central bank to deliver the first rate cut in June, the latest data has made them more confident in their call.

Financial markets have also upped the odds of a rate cut next month to more than 50%.

“Today’s data should have provided the all clear on the inflation front that the Bank of Canada needed to start cutting interest rates in June,” wrote Andrew Grantham, CIBC’s executive director of economics, in a client note.

The steady decline of inflation and prospect of imminent rate cuts likely offer some relief to Prime Minister Justin Trudeau’s government as well.

Since last summer, the governing Liberals have been pummelled by Conservatives in public opinion polls over cost-of-living issues.

Rapidly rising grocery prices have been a top concern, in particular.

And while food prices are significantly higher than they were a few years ago, the data shows grocery prices grew at a modest pace in April, rising 1.4%t from a year ago.

Meanwhile, higher gasoline prices moderated the deceleration in inflation last month, with pump prices rising 6.1%t year-over-year.

Excluding gasoline, prices were up 2.5% from a year ago.

“I think what’s really the most encouraging is that we saw continued softness in some of the core measures that the Bank of Canada is looking at when it’s looking to judge when and how quickly to cut interest rates,” Grantham said in an interview.

The Bank of Canada’s core measures of inflation, which strip out volatile prices, slowed last month and are all now below 3%.

The central bank has signalled that it is inching closer to cutting interest rates but wants to see the slowdown in inflation sustained for longer.

For months, economists have been expecting the Bank of Canada to begin lowering its policy rate in June or July.

While the latest inflation figures have shifted expectations toward the earlier option, there are still some who are betting on the central bank taking a more cautious approach.

TD says it still thinks the central bank will wait until July to cut, noting the annual inflation rate is still to close to the upper bound of the Bank of Canada’s 1–3% inflation target range.

“But June or July, Canadians can be increasingly confident that alongside lower inflation, interest rates are headed lower soon,” wrote Leslie Preston, a managing director and senior economist at TD.

If the Bank of Canada cuts interest rates next month, it would be ahead of peer central banks in the U.S., Britain and European Union.

The Bank of Canada’s key interest rate currently sits at 5%, the highest it’s been since 2001.