Canada's inflation cools to three-year low boosting June rate cut bets

By Promit Mukherjee and Ismail Shakil

OTTAWA (Reuters) - Canada's annual inflation rate slowed to a three-year low of 2.7% in April and core measures continued to ease, data showed on Tuesday, prompting money markets to see an increased chance of an interest rate cut in June.

Analysts polled by Reuters had forecast inflation to cool to 2.7% from 2.9% in March. Month on month, the consumer price index rose 0.5% in April, also less than a forecast of a 0.6% gain.

The April inflation figures are critical for Bank of Canada Governor Tiff Macklem, who has repeatedly said he would like to see more evidence that prices are easing before deciding on when to start cutting rates.

"Canadian central bankers should have the evidence they need to begin easing monetary policy," Royce Mendes, head of macro strategy for Desjardins Group, wrote in a note, adding that he was expecting the first rate cut to happen in June.

After the data's release, money markets increased their bets for a rate cut on June 5 to almost 55% from 39% earlier.

The Canadian dollar weakened after the inflation data by 0.29% to 1.3663 against the U.S. dollar, or 73.22 U.S. cents at 1242 GMT. Yields on the government's two-year bonds were down 7.3 basis points to 4.269%.

"There is no longer any question about the trajectory, and the Bank of Canada is out of excuses to dither and wait for further confirmation to cut at the June meeting," said Kyle Chapman, FX Markets Analyst at Ballinger Group.

The BoC has cranked up interest rates by 475 basis points since March 2022 until last July and since then has held them steady at a near 23-year high of 5%.

This has helped in easing the rate of increase in prices from a high of 8.1% seen two years ago, but the final lap to reach the BoC's 2% inflation target has been difficult, especially due to shelter costs, wage pressures and food prices.

Shelter prices - which includes mortgage costs and rents - increased by 6.4%, a tad slower than the previous month, and food prices, services and durable goods led the deceleration in headline inflation, Statistics Canada said.

The cooling was moderated by gasoline prices; excluding them, annual inflation slowed to 2.5% from 2.8% in March.

The central bank's preferred measures of core inflation also eased. CPI-median slowed for the fourth straight month to 2.6% from 2.9% in March, while CPI-trim decreased to 2.9% from 3.2%., its first drop in several months.

The three-month annualized rates of the core measures remain well below the central bank's 2% inflation target, a signal that underlying price pressures should continue to pull headline inflation lower in the months to come, Dejardins' Mendes said.

Tuesday's report is the last major data to be released before the Bank of Canada's next rate announcement on June 5, except GDP numbers which will come on May 31.

In April, an acceleration in gasoline prices added upward pressure on inflation, as higher costs associated with switching to summer blends, higher oil prices due to supply concerns and an increase in the federal carbon levy all contributed to the increase in prices, Statscan said.

Grocery price gains slowed to 1.4% annualized, led by slower growth in meat prices. Excluding volatile food and energy, prices rose 2.7% compared with a 2.9% rise in March.

Services prices rose 4.2% on an annual basis, while goods prices increased by 1%, Statscan data showed.

(Reporting by Promit Mukherjee and Ismail Shakil; Additional reporting by Dale Smith; Editing by Alison Williams and Jonathan Oatis)