Underlying CPI growth softens again in Canada
The April CPI release showed Canadian price growth undershooting expectations across the board, severely denting the case for BoC rate hikes over coming months.
Indeed, we see growing risks that the Governing Council resurrects its March guidance at next month’s meeting, indicating that, if it were not for the current Middle East tensions, a rate cut would be under consideration. In our view, that should mean growing downside risks for the loonie.
Looking at the data, headline CPI growth was recorded at 2.8% YoY last month. That is, admittedly, up from 2.4% in March, but is still 0.3pp below consensus expectations. Energy-related costs continue to push the aggregate reading higher, with gasoline rising almost 8.9% MoM, and transport costs also up 2.2% in April alone.
More pertinent for the BoC, however, are the Bank’s preferred core-median and core-trim measures of underlying inflation.
Pre-release, economists had predicted an unchanged annual growth rate for both in April. In fact, these two measures each dipped 0.2pp, with core-median price growth slipping to 2.2% YoY, and core-trim falling to 2.0%. Meanwhile, annual inflation excluding food and energy costs slumped to just 1.5% YoY last month, down from 1.9% in March, and a full percentage point below the 2.5% growth rate recorded in December 2025.
In short, while consumers might be facing higher energy costs, these are not translating into broader price pressures. If anything, the opposite appears to be true, with data suggesting a pullback in aggregate demand as higher energy costs squeeze household finances. That certainly tallies with labour market readings, which continue to scan as soft. And, with July’s USMCA review looming on the horizon, posing another downside risk to growth, we expect a more dovish tone from the BoC next month.
Certainly, the 46bps of 2026 tightening priced by swaps looks far too aggressive in our eyes.
As such, we anticipate pushback from the Governing Council over the coming weeks. Assuming no immediate Middle East peace deal is agreed, that should keep USDCAD risks skewed higher, with a break above 1.38 now well within range near term.
Underlying price growth continues to cool in Canada, which should elicit a degree of caution from the BoC - pushing back on market rate hike expectations
Source: Bloomberg, Monex Europe