NBF maintains the easing cycle isn’t over

Amid stronger labour markets and ongoing inflation concerns, the Bank of Canada (BoC) is unlikely to cut rates next week, but the prospect of future rate cuts persists, according to National Bank Financial Inc. (NBF).

In a report previewing the upcoming rate decision, NBF said it’s now very unlikely that the BoC will cut rates next week. NBF had previously forecast a July cut, however, the latest economic data has altered that call.

“Those who had earlier been expecting a cut in July, us included, were dealt a blow this month when hiring was reported to have surged in June and underlying inflation failed to moderate,” it noted. “The closely watched Business Outlook Survey was hardly upbeat but still-soft sentiment is insufficient to compensate for firm core inflation and strong job growth.”

While the market is nearly unanimous in expecting that the central bank will leave rates unchanged, NBF said there’s now also “growing momentum around the idea that the easing cycle is over.”

NBF isn’t adopting this view and it doesn’t expect the central bank to signal that either.

“Instead, they’re likely to keep guidance unchanged, reiterating that they’re proceeding carefully and monitoring the same four indicators: export demand; tariff impacts on investment, employment and spending; inflation; and inflation expectations,” it said.

This approach leaves scope for possible cuts later this year, the report noted.

“There are signs that Canada’s economy will underwhelm in the months ahead as businesses and consumers tread cautiously,” NBF said.

“Trade impacts may not be as bad as feared but exports are unlikely to be a reliable source of growth. A trade ‘deal’ with the U.S. would be helpful to address uncertainty but an agreement will still involve material protectionism and is unlikely to return the economy to its pre-Trump growth path.”

Ultimately, inflation will be the primary driver of future rate decisions, NBF said.

“To us, the disinflationary pressures associated with marginal economic slack will outweigh tariff-related cost pressures which should keep all-items CPI contained and moderate core inflation.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.