Despite an increase in Canada's CPI inflation thanks to higher prices in travel-related services and base-year effects in cellular services, Bank of America analysts anticipate the Bank of Canada to cut interest rates by 25 basis points in July, expecting economic weaknesses and potential core inflation softening to influence this decision.
In May, Canada's Consumer Price Index (CPI) inflation rose to 2.9% year-over-year (yoy) from 2.7% in April, surpassing expectations.
The increase was primarily driven by higher prices in travel-related services such as tours and airfare, alongside notable base-year effects in cellular services.
Excluding gasoline, CPI increased to 2.8% yoy. On a monthly basis, inflation was 0.6% month-over-month (mom), driven by higher costs in travel services and seasonal increases in groceries.
Core inflation, which averages trimmed and median CPI measures, also saw an uptick to 2.85% yoy. Despite this, mortgage interest costs decreased slightly to 23.3% yoy.
Analysts at Bank of America expect economic weakness to exert downward pressure on core inflation moving forward.
In a note following the release of the data, Bank of America analysts adjusted their inflation forecast for 2024 to 2.4% yoy, up from 2.2%, incorporating the latest numbers.
Despite the uptick in inflation, they anticipate the Bank of Canada (BoC) will proceed with a 25 basis point interest rate cut in July, citing ongoing economic challenges and potential softening in core inflation. However, the report notes that the BoC's decision could be influenced by upcoming economic data releases, particularly the June CPI figures.
"We anticipate the BoC to maintain a more dovish stance compared to the Fed, with policy rates projected at 3.75% by end-2024 and 3% by end-2025,” analysts wrote.
“We believe that inflation is on a path to 2%, so we believe a cut in July is still likely.”