The Canadian dollar was little changed against the greenback on Tuesday after an unexpected increase in Canada’s annual inflation rate reduced the odds of a rate cut in July. The loonie has garnered some momentum over the past month, but it is still down on the year.
According to Statistics Canada, the annual inflation rate edged up to 2.9% in May, up from 2.7% in April. This topped the consensus estimate of 2.6% and was fueled by higher transportation, grocery, health care, and housing costs.
On a month-over-month basis, the consumer price index rose 0.6%, up from 0.5% in the previous month. Economists had anticipated a print of 0.3%.
Core inflation, which omits the volatile energy and food components, swelled from 1.6% to 1.8%. The monthly core CPI rose 0.6%, higher than the market forecast of 0.2%.
The surprise inflation reading comes soon after the Bank of Canada (BoC) became the first G7 central bank to cut interest rates. While some had expected the institution to pull the trigger on another 25-basis-point rate cut in July, the higher-than-expected CPI report reduced the odds significantly.
BoC chief Tiff Macklem noted that policymakers could continue lowering interest rates if inflationary pressures ease. However, officials have also warned that they do not want to cut rates too quickly and potentially revitalize inflation.
“Reaccelerating inflation argues for the BoC cutting rates only slowly,” said Stuart Paul, a Bloomberg Economics economist, in a note. “One poor inflation report isn’t a trend, but we think the BoC will remain on hold at the July 24 meeting. With upside risks to inflation coming from home prices — which could rise as interest rates fall — and with only limited room to diverge from the Fed, we think the BoC will cut its overnight-rate target at just a quarterly cadence.”
This week’s next major data points will be the April and May GDP data.
Canadian government bond yields were mostly up across the board, with the benchmark five-year yield adding 7.1 basis points to 3.428%. The one-month yield was unchanged at 4.7%, while the 30-year bond jumped 2.1 basis points to 3.269%.
The USD/CAD currency pair was unchanged at 1.3657 at 17:47 GMT on Tuesday. The EUR/CAD declined 0.23% to 1.4627, from an opening of 1.4661.