Canada saw a surprising cooling in its inflation rate in February, marking its slowest pace since June. Core inflation measures, closely monitored by investors, also eased to more than two-year lows. This data revealed on Tuesday, spurred investors to increase their bets for a rate cut in June.
“Annual headline inflation cooled to 2.8% last month,” beating analyst predictions of a 3.1% rise and coming in below January’s 2.9% increase, Statistics Canada reported. The consumer price index rose by 0.3% for the month, falling short of the forecasted 0.6% rise.
Money markets responded by upping their bets for a 25 basis point rate cut in June to over 75%, compared to 50% before the inflation data release.
Bets for an April rate cut also rose to over 28% from 18% before the numbers were announced.
Royce Mendes, head of macro strategy for Desjardins Group, commented, “We expect central bankers will sound more dovish in April, thereby setting up a rate-cutting cycle beginning in June.”
The drop in inflation also led to a weakening of the Canadian dollar to a three-month low, with the loonie trading 0.54% lower against the dollar at 1.3604. Additionally, Canadian government 10-year bond yields fell by 9.5 basis points to 3.502%.
According to Statscan, Canadians in February benefited from softer price growth in food purchased from stores, as well as a drop in prices of cellular plans and internet services, which were the main contributors to the deceleration. Grocery prices rose by 2.4%, slower than the headline inflation rate for the first time since October 2021.
Analysts cautioned that based on the present data, a rate cut in June was justified, and any delay beyond that could have detrimental effects on the economy.
“By postponing any decision to cut until June, the Bank of Canada runs the risk … an outcome that could see it play catch-up with the economy in the second half of this year,” remarked Simon Harvey, head of FX analysis at Monex, in a note.
