US inflation falls to 3% in June: Here’s what that means for the Bank of Canada

The bond yield roller coaster is ending the week on a dive, taking fixed mortgage rates along for the ride. The reason for these latest discounts? Renewed expectations of rate cuts south of the border, which ups the likelihood of the same in Canada.

The main reason markets are in a cheery mood is due to the latest US Consumer Price Index (CPI) report out this morning, which showed the pace of inflation slowed to 3% in June (down from 3.3% in May). This was lower than the 3.1% called for by economists and paves the way for the US Federal Reserve – the American counterpart to the Bank of Canada  (BoC) – to cut its benchmark rate as early as September.

This is notable because – unlike the BoC, which has already cut rates once in June – the Fed has remained in limbo. The fight to pull inflation down from its record highs has been more stubborn in the US, while the labour market has stayed stronger than expected. That has led the Fed’s Federal Open Market Committee (FOMC) to opt to hold their benchmark rate at a range of 5.25 - 5.5% – its highest level since 2001 – since the start of the year, dashing previous expectations that it could cut rates as many as seven times in 2024.

Similarly to the BoC, the Fed implemented a historic 11-part series of rate hikes between March 2022 and July 2023 in efforts to cool inflation by slowing borrowing and consumer spending.

Powell: Inflation is making progress

The promising inflation report also follows comments made this week from the Fed’s Chair Jerome Powell, which have further stoked optimism in the markets. In testimony made to US Congress on Tuesday and Wednesday, Powell suggested the Fed was pleased with progress on inflation thus far, noting it has “eased considerably” since 2022. He also stated that the American job market has cooled, as the unemployment rate has increased three months in a row, to 4.1%.

While not outright stating that cuts are to come from the Fed, markets took Powell’s comments to indicate that lower rates are indeed on the way. As a result, both US treasuries and Canadian bonds have fallen; the five-year government of Canada bond now sits in the 3.3% range, down nearly 23 basis points from five days ago. That’s given lenders room to lower their fixed mortgage rates; rate shoppers are likely to see lower options next week should bonds continue to fall.

What does lower US inflation mean for the Bank of Canada?

Why should Canadians care about this latest US inflation print? Put simply, it increases the chance that our own central bank will cut rates in July.

The Canadian and American economies are very closely intertwined, especially when it comes to the cost of borrowing. Historically the BoC and the Fed have mirrored each other in terms of monetary policy (the act of cutting, holding, or hiking their benchmark interest rates). Because the two countries are such close trading partners, economic trends – such as spiking inflation – tend to affect both similarly.  That has certainly been the case following the first few years of the pandemic; as lockdowns were lifted, both countries struggled with supply chain challenges while consumer demand roared back, which drove inflation to record peaks north and south of the border.

However, progress in reigning the CPI in has been faster in Canada, which allowed the BoC to cut its benchmark Overnight Lending Rate by a quarter of a percentage on June 5th, bringing it to 4.75%. Markets have been largely split on whether it will cut again in its next rate announcement. especially as Canada’s May inflation report came in higher than expected. This improvement in the US CPI has stoked new optimism that the BoC will be in a cutting mood – and those hopes will only strengthen should we get good news on July 16, when Canada’s own June inflation numbers come out.

The next Bank of Canada announcement is scheduled for July 24, 2024.

Also read:

• Canadian CPI rises to 2.9% in May
• GDP rises 0.3% in April, won’t derail BoC rate cuts
• What does another US Federal Reserve rate hold mean for Canadians?
• Rising home prices made it harder to buy a home in May