By Ketki Saxena
Investing.com -- The release of Canadian consumer price index (CPI) data for May is scheduled to be reported by Statistics Canada tomorrow. While economists predict that headline inflation is likely to decrease, driven by lower energy and food prices, the expectation is for core inflation measures to remain sticky, increasing the likelihood the Bank of Canada will need to continue raising interest rates.
"The core metrics are likely to present a less favorable situation, reinforcing arguments in favor of additional BoC tightening," said Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist of fixed income strategy. "We predict an uptick in acceleration during May."
Reitzes does not believe that upcoming data like the consumer price index for May will alter expectations surrounding another 25-basis-point increase at the central bank's subsequent policy meeting slated for July 12th.
GDP Growth Expectations
In addition to CPI data, GDP figures are also anticipated later this week. Reitzes forecasts that "growth should remain fairly strong despite being slightly dampened by April’s public sector strike. Sentiment appears poised to stay somewhat subdued due to higher interest rates and inflation affecting overall outlooks."
The GDP growth rate during Q1 was considerably above what had been projected by the Bank of Canada, due to lagging effects from previous rate hikes, pent-up demand being released, ongoing tightness within labor markets, and population increases.
Implications for Bank of Canada Policies
All these factors are expected to provide "a reasonable rationale" for the central bank to persist with its rate hikes, according to Reitzes. Furthermore, he noted that "home sales rebounded after the BoC's January pause signal, and prices have followed suit in recent months despite mortgage rates climbing significantly over the past year."
The bottom line, as Reitzes noted, is that "If the most interest rate-sensitive segment of the economy isn't faltering under higher rate pressures, then policy rates probably aren't high enough yet."