Core measures of inflation rose on a monthly basis in April leading to an upward revision to our core inflation forecast despite lower oil prices. We now expect core measures of inflation to average 3.9% this year. Our predictions for total inflation are largely unchanged and have been stable over the last several forecasts. That being said, our inflation forecasts have been higher than the Bank of Canada’s for quite some time.
With core inflation rising (admittedly for one month only), we believe the Bank of Canada no longer has the luxury to wait to see how the balance of inflation risks evolves in coming months. As a result, we now think a 25 basis points move is required at the June meeting. Governor Macklem should leave the door clearly open to additional moves should those be required. We continue to expect the policy rate will be cut early next year and see little chance of a cut this year.
That being said, this move is best seen as insurance against inflation. Our model does not indicate a need for higher rates despite the April inflation shock and other developments.
- Scotiabank
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