The Bank of Canada is seen cutting interest rates ahead of the Fed in the US, analysts at the Bank of America believe, after Canada’s February inflation reading surprised to the downside once again.
Statistics Canada said on Tuesday that Canada’s Consumer Price Index (CPI) rose 2.8% year-over-year in February, down from 2.9% in January and below economists' estimates of 3.1%. Month-over-month, inflation rose 0.3%, less than the 0.6% expected.
Inflation continues to be driven by rent and mortgage interest costs, while price increases for cellular service, groceries and internet access services slowed.
Following the print, the BofA analysts revised their inflation forecasts to the downside, now expecting inflation to reach 2% by the year-end, down from its earlier forecast of 2.2%. They continue to expect year-end 2025 inflation to be 2%.
“The confirmation of a downward trend in headline and core inflation means that the beginning of the cutting cycle in Canada is not far,” they wrote.
“The BoC has said it needs to see a ‘further and sustained easing’ in core inflation. The January print checked the ‘further’ part, while the February print goes a long way in checking the ‘sustained’ part.”
With no other inflation print due before the BoC’s April 10 meeting and doubts about the Fed’s timing, the analysts see an April cut as too soon.
“We continue to expect the first cut to happen in June, but the rapid fall in core inflation increases the risk the BoC does a dovish turn in April, which is a meeting with Monetary Policy Report,” they wrote.
“We believe the BoC can cut in June even if the US Fed delays its first cut further.”