Despite January’s unexpected drop in inflation, economists believe the Bank of Canada will likely delay its first rate cut until mid-year. Headline inflation in January came in at 2.9%, below expectations of 3.3%, attributed to lower energy and grocery prices. The Bank’s preferred core inflation measures also trended downward, with CPI-median easing to 3.3% and CPI-trim falling to 3.4%. However, shelter costs continued to exert upward inflation pressure, particularly on rent prices due to housing supply-demand imbalances.
Economists note that despite the inflation slowdown, the Bank of Canada may hold off on rate cuts due to strong wage gains and firm service prices. While the possibility of rate cuts in the coming months has increased, the Bank is expected to remain cautious until further signs of easing inflation pressures emerge. Additionally, stronger-than-expected job gains in January provide the Bank with leeway to delay rate cuts for now. Bank of Canada Governor Tiff Macklem emphasized the importance of ensuring a clear path toward achieving the 2% inflation target before considering rate cuts.
Following the release of the latest inflation data, bond markets have slightly increased the odds of rate cuts, with a 29% chance of a quarter-point cut in March and an 11% chance of 50 basis points worth of easing by June. Overall, while the possibility of rate cuts has become more plausible, the Bank of Canada is expected to maintain a cautious approach, closely monitoring inflation trends and economic indicators before making any significant policy changes.
Published by: Steve Huebl