Prediction: Bank of Canada may Start Cutting Rates by Year-end

Canada's inflation rate, excluding food and energy costs, is expected to remain above 3% through Q4/2023, which could potentially hinder the Bank of Canada's (BoC) plans to cut interest rates soon.

Canada's inflation rate, excluding food and energy costs, is expected to remain above 3% through Q4/2023, which could potentially hinder the Bank of Canada's (BoC) plans to cut interest rates soon. While Canadian inflation has cooled in recent months, much of the support has come from lower energy prices, a component that the BoC tends to exclude when making policy decisions. Core inflation metrics, such as the Consumer Price Index (CPI), which excludes food and energy, are showing more persistence than the following general rates. This is because price pressure spreads from goods to slower-moving commodities, such as wages and services.

Prediction: Bank of Canada may Start Cutting Rates by Year-end Ph: instagram@kelsieandmorgan

The BoC has made greater progress in slowing inflation than several other central banks, including the US Federal Reserve (Fed) and the European Central Bank (ECB). The BoC expects inflation to hit 3%, the top of its target range of 1%-3% by mid-year, down from 4.3% in March. The BoC's final inflation target was set at 2%. However, rising inflation forecasts could be another reason for the BoC to be cautious about rate easing.

The BoC downgraded the market's valuation of a rate cut in 2023 and said it was ready to tighten further if needed to restore price stability. Investors have also bet on keeping rates steady for a while, then possibly easing in the fourth quarter of this year, rather than moving into a June rate cut as expected a few weeks ago. This indicates that the BoC is taking a cautious approach to interest rate cuts, given the persistent inflation rates.

The BoC's decision to exclude food and energy costs from its policy decisions is not uncommon among central banks. This is because food and energy prices tend to be more volatile and can fluctuate rapidly, making it difficult to make long-term policy decisions based on them. Core inflation metrics, on the other hand, provide a more stable and reliable measure of inflation, as they exclude these volatile components.

Canada's inflation rate, excluding food and energy costs, is expected to remain above 3% through Q4/2023, which could potentially hinder the Bank of Canada's plans to cut interest rates soon. The BoC has made greater progress in slowing inflation than several other central banks, but rising inflation forecasts could be another reason for the BoC to be cautious about rate easing. The BoC's decision to exclude food and energy costs from its policy decisions is not uncommon among central banks, as core inflation metrics provide a more stable and reliable measure of inflation.