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Odds of Canada rate hike shaken by subdued May inflation data

A sharper than expected slowdown in the pace of Canadian inflation last month has injected newfound uncertainty into whether policymakers will raise interest rates this year.

Core consumer prices were up 1.3 per cent year-on-year in May, down from the rise of 1.6 per cent recorded in April and expectations of 1.5 per cent, according to Statistics Canada. On a month-on-month basis, prices were up 0.1 per cent, short of the 0.2 per cent that analysts had forecast.

The Bank of Canada has three preferred measures of core inflation – common, trim and median. And of these, two slowed last month.

“The case for a Canadian rate hike before year-end 2017, which was never particularly solid, is crumbling,” said Bill Adams, senior international economist at PNC Financial Services Group.

“For the Bank of Canada to be ready to raise its overnight rate target, core inflation will have to pick up, and the quantity of jobs added in the first half of 2017 will need to be complemented by an increase in job quality in the second half… In addition, the recent leg down in global benchmark oil prices (WTI crude is near $43 per barrel today) is a headwind to a recovery of Canada’s energy sector.”

Prior to today, expectations have been increasing mounting that the Bank of Canada would move and raise interest rates this year following hawkish comments from two top policymakers last week. Strong first quarter GDP and a recent spate of solid consumer spending, retail sales and jobs data have further bolstered confidence over the economy.

The Canadian dollar fell as much as 0.6 per cent to C$1.3308 per dollar on the data. It later trimmed its losses to just 0.3 per cent to trade at C$1.3274.