BOC: Strong Core Inflation Could Keep BOC On Sidelines In June

Expectations for a June Bank of Canada cut were pared sharply by the hotter-than-expected April CPI report. In particular while the headline reading was slightly above-expected (1.7% Y/Y v 1.6% survey), the unexpectedly strong rise in the core metrics may keep the BOC holding the overnight rate at 2.75% for a 2nd consecutive decision  in June, after it held steady in April for the first time in 8 meetings.

• Meeting-dated OIS is now pricing in a little better than 35% chance of a 25bp June cut, vs closer to 70% pre-CPI.
• The BOC's latest quarterly forecast for Q2 trim/median average inflation was 2.95% (taking the average of the BoC's two trade scenarios), so the 3.15% printed in the first month of the quarter will give impetus for waiting on further developments before easing rates again.
• There are arguably some mitigating factors in the details, for instance a slight downtick in inflation breadth (more on which shortly), but the strong services readings through the report (3.5%, up from 3.1% prior) and durable goods (1.7%, highest since Q2 2023, after 1.1%) as well as on other core metrics (ex 8 most volatile & indirect taxes up to 2.5% from 2.2% prior). On the whole, underlying inflation appears to be reaccelerating if anything.
• Barring unexpected developments, for instance on the trade front, the remaining case for a cut on June 4 would appear to hinge on clearer evidence in the hard data that tariff uncertainty is translating through to activity to a degree that warrants accommodation. In that regard, Q1 GDP (May 30) could play a role, with May job market data (Jun 6) coming too late.
• The BOC's last statement noted that the governing council "will continue to assess the timing and strength of both the downward pressures on inflation from a weaker economy and the upward pressures on inflation from higher costs. Our focus will be on ensuring that Canadians continue to have confidence in price stability through this period of global upheaval. This means we will support economic growth while ensuring that inflation remains well controlled."