Upcoming Interest Rate Decision
The Bank of Canada (BoC) will press ahead with another interest rate increase in July. This comes despite predictions that the yearly inflation rate will considerably decelerate. The upcoming consumer price index report, unveiled by Statistics Canada this Wednesday, will provide the latest inflation figure before the BoC’s rate decision on July 12.
Analysts’ Predictions
James Orlando, TD’s director of economics, remains optimistic about the impending inflation data. “We expect the inflation rate to dip below 4%,” he stated. Analysts also hope to see a more substantial slowdown in food price increases, which have not decelerated as they have in the US recently.
Inflation Concerns Remain
In April, inflation increased to 4.4%, sparking worries within the BoC that progress on inflation was stalling, despite the bank’s aggressive rate hikes since March 2022. A prediction for May, however, expects inflation to drop by an entire percentage point to 3.4%.
The anticipated decrease in inflation may improve Canadians’ sentiment about the inflation outlook, potentially influencing future expectations. Nevertheless, concerns within the BoC persist. Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO and most forecasters, anticipates another rate increase in July. This expectation stems from the relentless concerns of the BoC – core inflation and a robust economy.
Reasons for the Rate Hike
The Canadian consumer’s resilient spending habits have been a key driver for the BoC’s decision to raise rates in its previous meetings aggressively. They are likely to prompt similar action in July. Earlier this month, the BoC announced a quarter of a percentage point rate increase, pushing its key rate to 4.75%—the highest since 2001.
Strong consumer spending, up 5.8%, drove economic growth in the year’s first quarter beyond predictions. “As Canadians keep spending, those price pressures keep increasing,” Orlando noted.
The Central Bank’s Stance
The BoC has been vigilantly observing core inflation, which excludes the measure’s volatility. Reitzes suspects that core inflation accelerated last month, signalling more potential issues for the central bank. However, the BoC has not yet given any indications to financial markets about its stance.
The BoC’s decision in July will be based on income data. Reitzes says, “Unless we see weakness across all economic indicators, it seems highly plausible that we’ll see another rate increase from the Bank of Canada.”