Slowing inflation | Where will the first interest rate cut come from?

Against all expectations, the Bank of Canada could begin lowering interest rates before the American Federal Reserve (Fed), following the second consecutive decline in the Consumer Price Index in February.

After falling to 2.9% in January, the CPI fell again to 2.8% in February, Statistics Canada reported Tuesday. This decline is a surprise because most economists expected inflation to rebound to 3.1%.

The slowdown in the CPI is mainly explained by a drop in the prices of cell phone services, food purchased at the store and internet access services, according to Statistics Canada.

The slowdown in price growth is widespread among the components of the consumer basket, and some of them, such as clothing, are showing a price decline.

The good news in February came from the food sector, where price growth slowed to 2.4%. This is the first time since October 2021 that the price of food has increased less quickly than the overall basket of goods and services that make up the CPI.

Prices of processed meat, particularly bacon, fresh fruit and fish, showed a decline in February.

Even if it increases less quickly, the price of food is still increasing. Over the past three years, between February 2021 and February 2024, prices in grocery stores have increased by 21.6%, Statistics Canada reported.

The cost of mortgage interest, attributable to rising interest rates, and the cost of rent, which can be explained by the scarcity of housing supply, continued to fuel inflation in February.

In Quebec, the inflation rate remained unchanged at 3.3%. It is now Alberta’s turn to have the highest inflation rate in the country, at 4.2%.

April or June?

The core inflation measures monitored by the Bank of Canada, CPI-tronq and CPI-med, also fell in February, but remain above 3%, above the target of 1 % to 3% of the central bank.

According to Desjardins economists, these two measures of core inflation probably overestimate the true inflation rate. In an analysis released Monday, they argue that by relying too much on these two measures, Bank of Canada leaders “risk maintaining an overly restrictive monetary policy for too long, which could cause unnecessary worry for households and businesses “.

Most economists are now worried that the Bank of Canada is doing too much to fight inflation, because the Canadian economy has been showing signs of distress for several months now.

“Given that recent communications from the Bank of Canada have focused on the resilience of inflation rather than signs of weak growth, there is a risk that it will cause too much damage to the economy by maintaining an overly restrictive monetary policy,” write National Bank economists Matthieu Arseneau and Alexandra Ducharme in their analysis of the latest inflation statistics.

Bank of Canada Governor Tiff Macklem has repeatedly said it would take more than a few months of falling inflation before changing course and starting to reduce the key rate.

The fact remains that the better-than-expected picture of inflation in January and February could encourage the Bank of Canada to ease up this spring. This was the last CPI reading before the central bank’s next rate decision in April.

The Bank of Canada will announce a policy change next month, predicts Randall Bartlett, senior director, Canadian economy, at Desjardins.

The tone could change in April, but we will have to wait at least for the other decision on rates, in June, before seeing the key rate fall, estimates Claire Fan, economist at the Royal Bank.

Bets remain on whether the Bank of Canada or the US Federal Reserve will announce an interest rate cut first. Until recently, the Fed had telegraphed three rate cuts this year, but the good performance of the American economy and the resilience of inflation seem to have changed the situation.

In Canada, given the weak economy, pressure is growing for the central bank to make the first move.


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