Hot U.S. inflation signal throws Bank of Canada a curveball

financialpost.com:

The Bank of Canada‘s upcoming interest rates decision just got more complicated after United States economic data out this week showed growth slowed while inflation remained elevated.

U.S. gross domestic product came in at 1.6 per cent for the first quarter, missing Bloomberg estimates for GDP of 2.5, and slowing significantly from the 3.4 per cent annualized rate recorded in the last quarter of 2023. Meanwhile, the U.S. Federal Reserve’s preferred gauge of core inflation climbed 0.3 per cent in March and 2.8 per cent year over year, causing markets to push predictions for the central bank’s first interest rate cut out to December, with some now forecasting no cut at all in 2024.

The possibility of increased hawkishness south of the border poses a wrinkle for the Bank of Canada — which many expect will cut rates in June — due to worries that too wide a spread between interest rates here and in the U.S. could hurt the Canadian dollar. That in turn would make it more expensive to buy goods from the U.S., Canada’s largest trading partner, reigniting the inflation the Bank of Canada hoped to cool.

For the moment, at least one currency watcher doesn’t think the June rate cut will be derailed by the U.S. data. It’s the subsequent cut he believes is in question.

“This shouldn’t really change the outlook for the BoC come June, with the bank still likely to cut rates given the economic resiliency and inflation persistence in the U.S. has yet to be imported to Canada,” Simon Harvey, head of currency analysis at Monex Europe Ltd., said in an email. “That said, while the BoC outlook remains clear in terms of domestic data, the risk of the Fed not cutting until December, if at all this year, definitely complicates matters beyond