Inflation in Canada is decelerating again, giving the Bank of Canada leeway to cut interest rates next week.

The consumer price index (CPI) rose 2.7% in June from a year ago, slowing from a 2.9% pace in May, Statistics Canada reported on Tuesday in Ottawa. That matched the median estimate of a Bloomberg survey of economists.

It’s the sixth straight month that Canada’s headline yearly inflation rate has been within the central bank’s target range, and brings the annual pace of price pressures back to their weakest levels since early 2021.

On a monthly basis, the index fell 0.1%, versus an expected gain of 0.1%. It rose 0.2% on a seasonally adjusted basis.

Tuesday’s data will likely give the Bank of Canada reassurance that the May surge in price pressures was temporary, and suggests that yearly inflation remains on track to reach the central bank’s 2% target some time next year. Economists say that leaves the door open for officials to cut the policy rate to 4.5% next week.

“Overall, there is nothing is today’s [Tuesday] report that should be worrisome for the Bank of Canada,” Charles St-Arnaud, chief economist at Alberta Central, said in an email. “Whether they cut or not may just be down to having a more cautious approach.”

The Canadian dollar weakened after the report, which was released at the same time as retail sales data in the US, and was trading at C$1.3698 per US dollar as of 11am Ottawa time. Canada bonds rallied and yields on government of Canada 10-year notes fell 4.8 basis points (bps) on the day.

Traders in overnight swaps increased their bets that the Bank of Canada would cut rates next Wednesday, putting the odds at about 90% compared with 80% before the release. 

Still, the report showed some evidence that underlying price pressures remain sticky. The three-month moving average of the core measures rose to an annualised pace of 2.91%, from 2.52% in May, according to Bloomberg calculations. Coupled with elevated service inflation, that momentum may raise questions about whether the central bank will have to slow the pace of rate cuts later this year.

The average of the central bank’s two core inflation measures decelerated on a yearly basis, averaging 2.75% in June from 2.80% a month earlier - roughly on par with what economists expected.

Following the release, the Bank of Montreal moved up its call for a rate cut to next week from September. 

“All told, the combination of Monday’s soft business outlook survey, the ongoing increase in the jobless rate and CPI making continued progress - even if it’s a bit slow - suggests the Bank of Canada will be cutting rates by another 25 basis points at next week’s policy meeting,” Benjamin Reitzes, rates and macro strategist at BMO, said in an email.

June’s inflation print is the last of two reports - and the final major economic data release - before the next rate decision on July 24. 

Governor Tiff Macklem and his officials lowered the benchmark overnight rate by 25bps in June, saying they were more confident inflation was headed to the 2% target after seeing several months of cooling price pressures. But May’s inflation report, released just weeks after the rate cut, showed price gains unexpectedly reaccelerated.

On Monday, the bank’s surveys showed business and consumer expectations for inflation remain subdued, with firms seeing slowing growth in input and selling prices. The share of businesses reporting labor shortages is also at an all-time low and their expectations for wage increases over the next year have slowed.

During their deliberations for the June 5 decision, officials discussed whether to wait until July to cut interest rates to confirm inflation was still on track to reach the target - confirming they’re not yet certain about the path to price stability.

Macklem has said on several occasions since the June rate cut that it’s reasonable to expect further policy reductions if price pressures continue to ease, but that policymakers don’t want to lower rates “too quickly” and jeopardise progress on inflation.

In June, mortgage interest costs and rent remained the biggest contributors to the annual change in the rate of inflation, rising 22% and 8.8% respectively. Excluding shelter costs, the consumer price index rose 1.3% from a year ago, versus 1.5% in May.

Excluding food and energy, the index rose 2.9% from a year ago matching the previous month. Services inflation increased 4.8%, compared with 4.6% in May.

Food prices rose 2.8% on the year, while durable goods fell 1.8%.

  - Bloomberg