As the Canadian Consumer Price Index (CPI) growth rate slowed significantly to 1.7% in April, expectations for a rate cut grew, but core inflation indicators are rising, deepening the central bank’s concerns. Statistics Canada announced on the 21st that the annual CPI growth rate fell from 2.3% in March to 1.7% in April.
This is analyzed to be mainly due to the 18.1% year-on-year drop in gasoline prices as the federal government’s carbon tax ends in April. Natural gas prices also recorded a double-digit drop. However, core inflation excluding energy rose to 2.9%, up from the previous month (2.5%).
The core inflation indicators that the central bank is monitoring also exceeded 3%, showing that inflation pressures are still strong. BMO Managing Director Benjamin Wrights said, “Although the surface figures have slowed, internally, inflation is stronger than expected,” adding, “It is a burdensome situation to continue to cut interest rates.”
The Bank of Canada, which is set to decide on the benchmark interest rate on June 4, maintained a cautious stance by freezing the interest rate at 2.75% last month. At the time, the stance was that the impact of the trade conflict with the United States on the economy should be observed a little longer.
The market had estimated the possibility of a June interest rate cut at 64%, but after this price announcement, the probability dropped to less than 35%.
Major financial institutions such as TD Bank and CIBC assessed that “it will be a difficult decision due to the overlapping signs of an economic slowdown and a rebound in inflation.” Meanwhile, Statistics Canada announced that Canada’s unemployment rate rose to 6.9% in April, and that employment declines were particularly notable in trade-sensitive industries such as manufacturing.
While the Canadian economy is showing signs of contraction overall, the rise in core prices is putting constraints on the central bank’s monetary policy. Food prices recorded a 3.8% increase, higher than the overall rate.
Frozen beef (16.2%) and coffee and tea (13.4%) showed double-digit increases, maintaining a higher increase than the overall price for three consecutive months. Travel costs have also increased. April travel prices rose 3.7% from the previous month, rebounding from an 8% drop in March.
“This price report will further complicate the central bank’s policy judgment,” said Andrew Henchik, chief economist at TD Bank. “However, the possibility of two more rate cuts in 2025 remains valid.”
The central bank’s next judgment will become clearer after the first-quarter GDP growth rate is released next week. Andrew Granum, chief economist at CIBC, analyzed, “If the possibility of a second-quarter contraction is confirmed, a June cut cannot be ruled out.”