Yahoo Finance June rate-cut bets rise as Canada's inflation cools more than expected
Canada’s annual inflation rate unexpectedly slowed to 2.8 per cent in February, bolstering expectations that the Bank of Canada will soon come off the sidelines and begin cutting interest rates.
Statistics Canada said on Tuesday that contributors to February's deceleration included an easing of grocery prices, and the cost of cellular services and internet access services. Offsetting the slowdown was a year-over-year rise in gas prices, which climbed 0.8 per cent after a 4 per cent drop in January.
Analysts polled by Reuters had expected inflation to accelerate to 3.1 per cent in February, following an increase of 2.9 per cent in January.
"There was unambiguously good news on the inflation front in Canada in February," CIBC Capital Markets senior economist Katherine Judge wrote in a research note, adding that the latest inflation data are "clearly encouraging from the Bank of Canada's perspective."
"It is the last inflation report that policymakers will receive before the April forecast update and announcement, and will allow them room to sound more dovish at that meeting, even though they will likely want to wait to see more evidence of the labour market loosening before pulling the trigger on interest rate cuts in June."
The latest print marks the second month in a row that inflation is within the Bank of Canada's target range of between one and three per cent. It is also running below the central bank's own projections for inflation. In January, the Bank said it expected CPI to be 3.2 per cent in the first quarter.
The Bank of Canada's preferred measures of core inflation also edged down in February, dropping to their lowest levels in more than two years. CPI-median slowed to 3.1 per cent from 3.3 per cent in January, while CPI-trim decreased to 3.2 per cent from 3.3 per cent. The central bank had previously flagged that it needs to see "further and sustained easing in core inflation" before it would consider cutting interest rates.
"Monetary policymakers will be able to breathe a sigh of relief after seeing these numbers," Desjardins managing director and head of macro strategy Royce Mendes wrote in a research note on Tuesday.
"We expect central bankers to sound more dovish in April, thereby setting up a rate-cutting cycle beginning in June."
On Tuesday, money markets increased their bets for a first 25 basis point rate cut in June to 75 per cent, up from 50 per cent before the inflation data release. The central bank's next decision is April 10, before March inflation print is released.
"At a minimum for April, look for the Bank to open the door to rate cuts," BMO chief economist Douglas Porter wrote in a research note.
"BMO continues to call for a June start to rate cuts, and this report certainly reinforces our conviction."
Food price growth slows
Grocery price growth eased to 2.4 per cent in February, down from 3.4 per cent in January. Statistics Canada says the slower price growth was broad-based. Meat prices were up 2.6 per cent year-over-year, dairy products up 0.6 per cent, cheese prices down 1.4 per cent, and fresh fruit down 2.6 per cent.
February marked the first month since October 2021 that grocery prices increased at a slower rate than headline inflation. The slower growth was partially due to base-year effects, as last February saw food prices rise in part owing to supply constraints.
The agency noted that "while price growth for groceries has been slowing, prices continue to increase and remain elevated."
"From February 2021 to February 2024, prices of food purchased from stores increased 21.6 per cent," StatCan said in a news release.
Consumers who signed on to a cellphone plan in February paid 26.5 per cent less compared to the same time last year, amid lower prices for new plans and increases to data allowances for some plans, StatCan says. Internet access service prices also fell 13.2 per cent annually.
Excluding gasoline, the Consumer Price Index (CPI) increased 2.9 per cent in February. On a monthly basis, CPI rose 0.3 per cent in February. Seasonally adjusted, CPI increased 0.1 per cent.
With files from Reuters
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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