According to an Edge Realty report for May 2024, there is a strong possibility that the Bank of Canada will implement an interest rate cut in June, with a cut in July appearing almost certain, as core inflation fell within the Bank of Canada’s 1% to 3% target range for the first time in three years last month.
The report further suggests that the Bank of Canada would have been waiting for two key developments before proceeding with a rate cut. The BOC would need to have seen a sustained decline in core CPI that suggested a continuing trend and a noticeable decrease in inflation expectations.
It predicted that the upcoming release of the Survey of Consumer Expectations in July would reveal a drop in inflation expectations, trending in the “right direction”, which would support rate cuts.
Source: Edge Realty
However, the key focus that the Bank of Canada is likely focussing on is core CPI, which seems to have been successfully achieved. Key measures of core inflation dropped significantly in April to 2.7%, down from 3.0% previously. This marks the eighth consecutive month of deceleration and the first time these key measures have returned to the 1% to 3% target range since July 2021. Additionally, the three-month change is currently at 0.5%, equating to an annualized rate of approximately 2%.
Source: Edge Realty
Headline inflation also cooled to 2.7% from 2.9%. However, it is useful to consider mortgage interest costs separately, as most other countries do. When these costs are excluded, inflation can be seen to have consistently been at 2% over the past four months.
Source: Edge Realty
Despite these positive inflation trends, there has been a concerning drift in interest rate path projections over time. At the beginning of the year, markets anticipated a cumulative 1.25% in rate cuts for 2024, with the first cut expected in March. Currently, expectations have decreased to just 0.5% in cuts, likely starting in July. Looking further ahead, there are predictions that the Bank of Canada’s key rate will be 3.5% in 2026, eventually bottoming out at 3.0% in 2028.
Furthermore, interest rates may be being influenced by the strength of the U.S. economy, despite signs of strain in Canada. This is particularly evident in metrics such as per capita GDP.
It appears efforts to control inflation are showing signs of success. However, there are continuing concerns, with key regulators like OSFI now warning about the serious impacts of high interest rates on consumers. OSFI anticipates that higher borrowing costs will lead to increased mortgage renewal risk, reduced consumer spending, and lower business investment. The Edge Realty report suggests that the Bank of Canada must consider these concerns.
While a rate cut in July seems almost certain, there is a strong possibility of a cut on June 5 as well.