A new round of inflation data shows that rate hikes are slowing down the economy, but it’s too soon to start celebrating just yet.
Driving the news: Canada’s annual inflation rate slowed a full percentage point to 3.4% in May, setting the stage for the Bank of Canada’s next interest rate decision in July.
- Over 60% of the slowdown can be tied to stabilizing energy prices. After Russia invaded Ukraine over a year ago, prices in the sector were thrown out of wack.
- But aside from the gas pump, Canadians aren’t feeling much relief. The inflation rate impacting groceries and mortgage interest costs hit 9.3% and 29.9%, respectively.
Why it matters: Although inflation is slowing, it’s still running way above the Bank of Canada’s 2% target. Analysts still widely expect another 0.25 percentage point interest rate hike this year, despite the fact that high rates have already cut into spending power.
- In a recent report, the global central bank body warned central banks not to take their foot off the gas, even though they’ve collectively hiked rates 470 times in two years.
- That’s easier said than done. Canada is uniquely sensitive to rate hikes, given that about a third of all mortgages involve variable rates—which rise alongside rate hikes.
What’s next: It’s likely that Tiff Macklem will keep a close eye on upcoming GDP data and the bank’s own Business Outlook Survey for signs of the economy slowing down.—LA