(Ottawa) Economists predict a further slowdown in inflation in May, which would be a step in the right direction for the Bank of Canada, which reduced its key rate for the first time in four years in June.
The Statistics Canada report, to be released Tuesday, will provide the first inflation data since the central bank announced a quarter-percentage-point cut in its key rate on June 5, bringing it to 4.75 %.
Economists say the new data could pave the way for another rate cut in July.
Bank of Montreal (BMO) and TD Bank respectively forecast that Canada’s annual inflation rate will slow to 2.6% and 2.5%, which would be a slight decline from 2.7% in the month of ‘april.
“It appears to be a quiet month for inflation. I would say at this point, less news is good news,” said Douglas Porter, BMO’s chief economist.
The Bank of Canada’s decision to cut the key rate marked a major turning point in its fight against inflation, which peaked at 8.1% in mid-2022.
After the announcement, Bank of Canada Governor Tiff Macklem said the institution was confident that inflation was moving closer to the 2% target, citing various indicators suggesting an easing of price pressures.
Economists say the new inflation data will strongly influence the pace of future policy rate cuts.
Looking ahead to the upcoming announcement on July 24, TD Bank Chief Economic Officer James Orlando said the next two inflation reports could pave the way for another rate cut.
“This will open the door to a possible decision by the Bank of Canada to make consecutive rate cuts,” he said.
Douglas Porter is of the same opinion. He points out that it would probably take a “bad discovery, this month or next month, to prevent the Bank of Canada from reducing [its rate].”
The Bank of Canada last week released a summary of its deliberations ahead of its June 5 decision, which revealed discussions about waiting longer before lowering the policy rate, ultimately deciding to cut it.
“While they recognized the risk that progress could stall — as has been the case in the United States — there was consensus that with four straight months of subdued inflation slowing underlying rate and indicators suggesting a continuation of the downward trend, progress had been sufficient to justify an initial reduction in the policy rate,” the summary said.
The document reiterates the central bank’s cautious approach and its intention to take decisions one at a time regarding the policy rate.
The Bank of Canada has been particularly encouraged by the recent slowdown in inflation.
For consumers, lower inflation translates into lower price increases when they go shopping, including at the grocery store.
In April, food prices increased at a modest pace of 1.4% from a year earlier, a significant decline from 2022.
“Food prices remain very high. there is no doubt. But they stopped increasing overall and groceries went from being a big problem for inflation to helping [to bring it down],” Porter said.
