Bank of Canada's June Rate Cut Hinges on April Inflation Data

The Bank of Canada's June interest rate decision hinges on the upcoming April consumer price index report, with economists expecting a rate cut if underlying price pressures ease. The central bank's next interest rate decision is scheduled for June 5, with the key interest rate currently at 5%.

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Aqsa Younas Rana
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Bank of Canada's June Rate Cut Hinges on April Inflation Data

Bank of Canada's June Rate Cut Hinges on April Inflation Data

The Bank of Canada's decision to cut interest rates in June depends on the upcoming April consumer price index (CPI) report, with a majority of economists expecting a rate cut if underlying price pressures ease for the fourth straight month. The key CPI report is expected to show a 0.3% rise in April, with an annual gain of 3.6%, according to economists polled by Reuters.

Why this matters: The Bank of Canada's interest rate decision has significant implications for the country's economy, influencing borrowing costs, consumer spending, and overall economic growth. A rate cut could provide relief to consumers and businesses, but it also raises concerns about inflation and the effectiveness of monetary policy.

The Federal Reserve (Fed) has signaled it is still leaning towards eventual reductions in borrowing costs, but noted that recent disappointing inflation readings could make those rate cuts a while in coming. "Further declines in inflation 'could certainly get the ball rolling on rate cuts'," said Tom di Galoma, managing director and co-head of global rates trading at BTIG.

Debate over whether U.S. interest rates are high enough deepened among Fed officials this week. "If it is bad, it probably will determine the year because the Fed has to seriously consider whether they are sufficiently restrictive at this point," said Will Compernolle, a macro strategist at FHN Financial.

A survey on Friday showed that U.S.consumer sentimentsagged to a six-month low in May amid growing anxiety about inflation. The University of Michigan's consumer sentiment index plummeted 13% to 67.4 in May, its lowest level in six months, due to concerns about inflation, unemployment, and higher interest rates. This reading was worse than economists' expectations of 76.9.

Inflation expectations for the year ahead increased to 3.5% from 3.2% in April, while five-year inflation expectations rose to 3.1% from 3%. Uncertainty about the path of inflation may weigh on consumer spending in the coming months. High interest rates are also affecting consumers, particularly those carrying credit card debt or planning to make large purchases like homes or cars.

Benchmark 10-year note yields rose 6 basis points to 4.504%, while two-year yields gained 6 basis points to 4.868%. The inversion in the yield curve between two-year and 10-year notes was little changed on the day at minus 36 basis points. Key inflation data for April, including producer prices and retail sales, is due next week and will be closely watched by investors and policymakers.

The Bank of Canada's next interest rate decision is scheduled for June 5, with the key interest rate currently sitting at 5%, the highest it's been since 2001. The April CPI report will be the deciding factor in whether the central bank cuts rates in June. If inflation shows another leg downwards, it could open the door for a rate cut, according to economists.