Morning Market Brief August 21, 2024

Canada sees lowest inflation rate in three years

Statistics Canada released Canada’s inflation rate for the month of July yesterday. The report showed further moderation in Canada’s inflation rate, which might open the door for more rate cuts from the Bank of Canada (BoC) this year. While Canada isn’t out of the woods just yet with elevated inflationary pressures, particularly with energy prices potentially rising in the months to come, it is trending downward.

• Canada’s annual inflation rate was 2.5% in July, its lowest rate since March 2021. July’s rate was down from the 2.7% rate in June and matched estimates from economists, based on a survey by Bloomberg. The average of key measures of core inflation also softened in July.
• Shelter and food prices slowed in July. The BoC was expecting shelter costs to moderate as it lowered interest rates. In July, there was a decline in mortgage costs and rent. Food prices remain elevated despite easing in July, putting pressure on Canadian households.
• While trending downward, Canada’s inflation rate could be choppy in the months to come. Energy prices were relatively low at this time last year, so the low base effect could put upward pressure on overall inflation.
• What will the BoC do next? Markets expect the BoC to cut rates again in September. While that might not be a guarantee, it is appearing likely amid slower inflation and weakening economic conditions. The BoC’s benchmark overnight interest rate currently stands at 4.50%.

Canada’s inflation rate is inching closer to the BoC’s 2% target. Despite still posing a risk to the Canadian economy and the BoC’s outlook, the downward trend might keep the BoC on the path of lowering interest rates. Markets are currently expecting another rate cut from the BoC at its September meeting, which would be its third straight. The BoC is seeing a need to help stimulate Canada’s economic activity.

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