June CPI should kill off BoC hiking bets
Coming just a week after the BoC’s latest rate decision, June CPI should kill off rate hike bets in Canada.
Not only did headline price growth slip more than expected, falling from 3.2% to 2.8% versus a 2.9% consensus, but underlying price growth also surprised to the downside.
Annual core median and core trim inflation dropped to 1.9% and 1.8%, respectively, against a median forecast for both to remain unchanged relative to May at 2.1% and 2.0%. With another set of soft inflation readings in hand, we continue to expect no change in rates from the BoC throughout the rest of the year.
Admittedly, there are a handful of hotter spots in this latest inflation report, if the Governing Council goes looking. CPI ex-food and energy, which was expected to rise from 1.6% YoY in May to 1.7% last month, ultimately printed at 1.8%. Importantly, this was driven by non-shelter components too, hinting at a possible uptick in broader price pressures, although given a World Cup-related boost to some travel components, we are not drawing firm conclusions.
Still, this should not detract from the fact that, however the data is diced, on almost every significant measure of underlying price growth, inflation is now running below the BoC’s 2% target rate.
While that is likely to be welcome news for the BoC, we suspect the Governing Council will want to avoid any immediate declarations of victory just yet. After all, June saw a sharp decline in global energy costs, contributing heavily to a 7.9% single month fall in gasoline prices last month. That can reasonably be expected to reverse in the July data, given a more recent uptick in Middle East hostilities, which have once again closed the Strait of Hormuz to shipping, driving oil prices higher. As such, ratesetters will likely remain wary of potential second-round effects, if prior guidance is any indication, despite the lack of evidence of such impacts since the start of the conflict.
Putting all that together, we think this latest CPI data favours no change to the Bank’s present stance. The BoC held rates unchanged at 2.25% earlier in the month and continues to point toward two-sided risks to their price stability mandate.
Today’s data validates that view, even as the need for tighter policy is fading as a risk, pushing back on pre-release swap pricing that had embedded a near-80 % chance of a rate hike before Christmas.
That has, in turn, weighed on the loonie, with USDCAD now trading back in the mid-1.40s, up around 0.3% from this morning’s lows. A further paring back in BoC hiking bets would pose a short-term loonie headwind, but given our expectation of no change in rates from the Fed as well, rate differentials should help push USDCAD lower over the medium run.
Core-median and core-trim price growth both continue to ease, a dynamic that should carry more weight for the Governing Council than a possible headline uptick in July
Source: Bloomberg, Monex Europe