Expectations for a June interest rate cut by the Bank of Canada have cooled significantly following the release of April inflation data. While headline inflation fell to 1.7%, the Bank’s preferred core inflation measures rose above 3%, challenging the case for an immediate policy move.
Just one week ago, markets placed the odds of a cut at 64%. As of Tuesday afternoon, that figure dropped to just under 35%, according to LSEG Data & Analytics, reflecting growing uncertainty among investors and economists alike.
What’s Driving the Shift?
Statistics Canada’s April report showed that headline inflation eased from 2.3% in March to 1.7%, largely due to the removal of the federal carbon tax and falling energy prices. Gasoline costs dropped 18.1% year-over-year, and natural gas prices also saw significant declines.
But beneath the surface, inflation wasn’t as friendly. Excluding energy, inflation actually rose to 2.9%, and core inflation – which strips out volatile items – exceeded 3% across all three key measures tracked by the Bank of Canada.
“If you look a little bit deeper, the inflation numbers were unfortunately stronger than most everybody expected,” said Benjamin Reitzes, managing director at BMO Capital Markets.
Core Inflation vs. Economic Slowdown
The Bank of Canada finds itself in a bind: rising core inflation suggests it should hold or even raise rates, while economic indicators – including a rising unemployment rate and weak manufacturing – suggest the economy needs support.
- Unemployment rose to 6.9% in April, according to Statistics Canada
- Job losses were especially pronounced in trade-sensitive sectors
- Grocery prices jumped 3.8% in April – continuing a trend of food inflation outpacing CPI for three straight months
“Signs of renewed weakening in the economy on one hand, but stronger core inflation on the other, make for a tough decision,” said Andrew Grantham, senior economist at CIBC.
Where Economists Stand Now
- BMO is urging caution, suggesting the Bank maintain its current rate to avoid undermining inflation control.
- CIBC says the June 4 cut is now uncertain and depends heavily on upcoming GDP data.
- TD Economics still expects two rate cuts this year but acknowledges that April’s inflation report “complicates” the timing.
“Inflation has gone the wrong way,” Reitzes said. “If the Bank wants to maintain credibility, it should keep rates steady.”
All Eyes on Q1 GDP
There’s still one major data release before the June 4 interest rate decision: Canada’s Q1 GDP report, due next week. If it shows a contraction or further signs of economic slowdown, the Bank of Canada may proceed with a cut despite sticky core inflation.
“If GDP shows the economy is heading toward contraction in Q2, that could be enough to push the central bank to a cut,” Grantham noted.
The Bottom Line
April’s inflation report has created a complicated policy backdrop for the Bank of Canada. While energy relief helped lower the headline number, the rise in core inflation has economists dialing back expectations for a near-term rate cut.
Still, with trade tensions, job losses, and weak GDP in play, many experts believe rate cuts are still coming – just not as soon as originally predicted.
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