However, Davis believes that investors will have to wait a little longer than June before the industry sees any easing. He notes that Canadian CPI is trending downwards, but wage inflation and other inflationary factors could still pose risks in Macklem’s view. US inflation is a risk, too. Wednesday’s higher-than-expected US CPI print which has moved most expectations of possible interest rate cuts in the United State from June to September. Because there’s no market expectation of an ease in the US in June, if Canada were to start easing before the US Federal Reserve does, it would have “significant implications on the currency.”
“It would weaken the Canadian currency, which in and of itself, there’s a plus and a minus to it,” he says. “The plus side to having a weakening Canadian currency is it should increase cross-border trade with the US, because we become a cheaper option. The minus side of it is it would increase inflation, because imported goods would become more expensive here.”
The BoC signalled inflation might be cooling faster than previously expected in an updated monetary policy report released on Wednesday. “We’ve hit all the qualifications for them to ease, they just want them to ensure that they’re sustained to allow them to ease, so that was a significant pivot in their language,” Davis added. “CPI prints are lower than expected, which is good thing, they have to let the market knows now they’re considering eases.”
Going forward, Davis pointed out that the BoC will focus on three things: core inflation, unemployment rate and wage inflation.
“The number one thing is wage inflation,” says Davis. This lines up with recent data as unemployment numbers in the country are below five per cent but wage inflation is somewhat elevated at 3.9 per cent. A target for reasonable wage inflation, is three per cent, added Davis. “Even though CPI is coming down, they’re looking at both CPI and its impact on wage inflation. They want to have confidence in one of [those] two things.”
