Canadian inflation cools to 2.8%

Canada’s inflation rate chilled in February to its gradual rate since June, and closely watched core inflation criteria reduced to over two-year lows, data showed on Tuesday, provoking investors to raise their bets for a June rate cut.

Better-Than-Expected Figures

Statistics Canada reported that annual headline inflation in Canada cooled to 2.8% last month, surpassing analyst expectations for a 3.1% rise. This marked a decrease from the 2.9% increase recorded in January. Additionally, on a monthly basis, the consumer price index rose by 0.3%, which was lower than the forecasted 0.6% rise.

Impact on Monetary Policy

Following the release of the inflation data, money markets adjusted their expectations for interest rate cuts. Bets for a first 25 basis point rate cut in June rose to over 75%, up from 50% before the release of the data. Furthermore, the likelihood of a rate cut in April increased to over 28%, compared to 18% previously.

Expectations for a Rate-Cutting Cycle

Royce Mendes, head of macro strategy for Desjardins Group, expressed expectations that central bankers would adopt a more dovish stance in April, paving the way for a rate-cutting cycle starting in June. 

The drop in inflation also contributed to the Canadian dollar weakening to a three-month low, with the loonie trading 0.54% lower against the dollar.

Factors Contributing to Inflation Deceleration

According to Statscan, Canadians benefited from softer price growth in food purchased from stores, as well as a decrease in prices of cellular plans and internet services. These factors were the main contributors to the deceleration in inflation. 

The rise in grocery prices eased to 2.4%, slower than the headline inflation rate for the first time since October 2021.

Analysts’ Warnings and Economic Impact

Analysts cautioned that with the current inflation data, a rate cut in June was warranted, and any further delay could have negative consequences for the economy. 

Simon Harvey, head of FX analysis at Monex, highlighted the risk of the Bank of Canada playing catch-up with the economy in the second half of the year if a decision to cut rates is delayed until June.