On May 21st, Canada released its latest inflation data, revealing that the inflation rate has dropped to a three-year low. In April, the Consumer Price Index (CPI) declined to 2.7%, down from 2.9% in March. This sustained decrease in inflation has led economists to widely anticipate that the Bank of Canada’s tightening cycle will come to an end, with the possibility of a first interest rate cut in June.

The Canadian economy has experienced four consecutive months of inflation deceleration, according to data from Statistics Canada. Andrew Grantham, an economist at the Canadian Imperial Bank of Commerce (CIBC), asserts that the recent inflation data “provided the all clear” for the central bank to consider rate cuts. Andrew DiCapua, a senior economist at the Canadian Chamber of Commerce, also believes that a rate cut in June is not only possible but has become a primary consideration. Tu Nguyen, an economist at RSM Canada, describes the rate cut as “no-brainer.” Additionally, Douglas Porter, Chief Economist at the Bank of Montreal (BMO), emphasizes that core inflation indicators have now fallen below 3%, aligning with the Bank of Canada’s target range of 1-3%.

AimStar Capital analyst states that while the cooling inflation is positive news for the Canadian economy, it’s essential to recognize that persistent high interest rates continue to drive up housing costs. Inflation data reveals that the inflationary pressure from housing costs has not completely dissipated, with a year-over-year increase of 6.4%. Furthermore, recent oil price hikes have added significant financial strain to Canadian households due to rising gasoline prices.

Our assessment suggests that the likelihood of a rate cut in June is high for Canada. However, the central bank may exercise caution in taking action in July. Despite the open door for rate cuts, we remain cautious about the speed and frequency of rate reductions. The Federal Reserve’s consistently hawkish stance throughout 2024 and conflicting economic data in the United States play a role. Additionally, Canada maintains relatively close interest rate differentials with the U.S. due to their interconnected economic activities.

For individual investors, vigilance is crucial. Consider investments in fixed-income bonds that may benefit from rate decreases, as well as real estate and energy sectors to counter inflationary pressures. As we navigate the ever-changing economic landscape, assets diversification remains key. We will adjust investment portfolios based on macroeconomic shifts and hedge against ongoing economic uncertainties, leveraging anticipated changes in monetary policy in the short term.