According to Statistics Canada, the country’s inflation rate inched up to 2.9% in March, juiced by higher gasoline prices. That’s up from 2.8% in February but still close to its 2% target. The March results were also in line with what Bay Street analysts were expecting.
While the consumer price index (CPI) rose slightly, measures for core inflation slowed for the third straight month. Core CPI excludes more volatile factors including food and energy. Cooling core inflation boosts the odds of a June interest rate cut.
Earlier this month the Bank of Canada said it would need to see evidence that core inflation was slowing sustainable before it would consider a first interest rate cut. And that’s what it found in the March inflation data.
In the U.S., where the economy is booming, the U.S. Federal Reserve is expected to announce fewer, shallower interest rate cuts than initially expected. This is in sharp contrast to Canada where the economy has been straddling zero to negative growth for months.
With flat economic growth and inflation falling, the Bank of Canada almost needs to find a reason not to announce its first rate cut when it meets next on June 5. If you strip out mortgage costs, Canada’s inflation rate is at the target of 2%, and real gross domestic product (GDP) is less than 1%.
Before the pandemic, the capacity utilization, or CAPU rate (a measure of production capacity), was at 80%, the unemployment rate was 5.5%, and the Bank of Canada’s Consumer Price Index (a slightly different measure of inflation than Statistics Canada) was at 2%. Those numbers are almost identical to where we’re at right now. The only difference? Before the 2020 health crisis interest rates were at 1.75%, not 5%.
The Bank of Canada was late to the table raising interest rates and needs to start cutting rates before it’s too late again. A rate cut would be a welcome relief for Canadians. Lower interest rates make borrowing cheaper for consumers and businesses. It would also probably reignite the Canadian housing market.
Rate cuts will probably not be good for the Canadian dollar. A strong U.S. economy and dollar and a weak Canadian economy could see the loonie drop to $0.71 U.S. in the third quarter and $0.70 U.S. in the fourth quarter.
One analyst said it could eventually result in the Canadian dollar “easily” tumbling to $0.50 U.S.
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