Inflation expectations cast shadow on BoC's rate decision

  4/3/2024 |   SHARE
Posted in Canadian Economy and Interest Rates by Heather Ann Lemieux| Back to Main Blog Page

Inflation expectations cast shadow on BoC's rate decision

Economists question their forecasts as inflation expectations challenge anticipated rate cuts

New data from the Bank of Canada has economists questioning their earlier predictions for a first interest rate cut.

The central bank’s recent business and consumer outlook surveys reveal that while inflation expectations have improved slightly, they remain elevated.

Stephen Brown, deputy chief economist at Capital Economics, said this could prompt policymakers to delay action.

“[Inflation forecasts] are still too high and raise the risk that the bank will wait to see developments in the next surveys in July before it cuts interest rates,” he said.

If this happens, the next opportunity for a cut would be the Bank’s July 24 meeting, contradicting the current consensus of a June cut.

Surveys show inflation concerns persist

While Canadians perceive inflation has slowed, their near-term expectations "have barely changed", the central bank said.

Expectations for five-year inflation have also increased. Respondents cite high government spending, housing costs, and rent as lingering drivers of inflation.

Canadian consumers surveyed perceived inflation at 5.3%, well above the official 2.8% reading. About 60% cited food costs as a major factor in this elevated expectation.

Brown suggests that easing food prices could lower expectations in the next survey, although this might be countered by rising rental and gas costs.

“At the margin at least, the quarterly surveys may persuade the bank that there is no rush to loosen policy,” said Brown.

Economists see potential for delay

On the business side, the share expecting the CPI above 3% over the next year fell to 40% from 54%, but remained above pre-pandemic levels.

“The improving trends will be welcomed by policymakers, but aren’t enough to prompt rate cuts just yet,” Bank of Montreal strategist Benjamin Reitzes told the Financial Post. He believes a June easing remains possible but will depend on further signs of slowing inflation.

Recent strong economic growth figures further complicate the picture.  Canada’s economy expanded faster than expected in early 2024, exceeding Bank of Canada forecasts. TD Bank economist Marc Ercolao calls this a "difficult challenge" for the central bank.

While Capital Economics still expects a June move, Brown acknowledged "the risks are tilted toward a slightly later cut."

Two crucial data releases this week – international trade and the jobs report – could offer further insights, but economists anticipate no significant downturn signals in either.

Source: Canadian Mortgage Professional

Bank of Canada, Bank of Canada Benchmark Rate, Canada GDP, Canada Inflation Rate, Canada Living, Canada Real Estate

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