Weaker inflation could slow move toward rate hike

Steps by the Bank of Canada to prepare the country for an eventual interest rate hike are bumping up against an inflation rate that has eased up on the accelerator.

Weaker year-over-year growth in gasoline prices last month helped slow the annual inflation rate to 1.3 per cent for May, Statistics Canada said Friday.

The result was softer than economists expected and lower than April’s reading of 1.6 per cent, prompting some to predict it could slow the Bank of Canada’s move toward an interest rate hike.

The data point comes as the economy strengthens and the central bank sends out signals it’s moving closer to a rate increase. The bank will make its next scheduled interest rate announcement on July 12 when it also updates its economic outlook.

The latest inflation figures could play a key role in that decision. For one, the headline inflation rate moved further away from the bank’s target of two per cent. The data also showed lower readings for two of the Bank of Canada’s three measures for core inflation, which omit volatile items. Two of the core readings slowed to 1.5 per cent and 1.2 per cent. The other one was unchanged at 1.3 per cent.

Last week, governor Stephen Poloz signalled he’s inching closer to a hike as the economy builds momentum in several key areas.

The bank’s benchmark rate has been at 0.5 per cent for two years.

Before the data release Friday, some analysts had predicted the bank could start raising the rate as early as next month. But the continued softness, particularly for core inflation, is considered by many as a reason for the central bank to hold off a little longer.

“As much as the Bank of Canada has seemed a bit dismissive of those recent inflation numbers, I think it would be hard for them to raise rates in July given the decline that we saw again in May’s inflation,” said Josh Nye, an economist with RBC Economics Research.

But Jimmy Jean of Desjardins Capital Markets argued that inflation numbers won’t necessarily be definitive when it comes to next month’s rate decision. Jean wrote in a research note that senior deputy governor Carolyn Wilkins recently indicated the weakness in core measures was consistent with the lagged impacts of past quarters, rather with the forward-looking focus of the bank.