Concerns about persistent inflation in Canada are exaggerated, and markets are underestimating the extent of future monetary easing by the Bank of Canada (BoC), says Royce Mendes, managing director and head of macro strategy at Desjardins Group.
According to Mendes, the BoC should shift its attention from inflation to the broader economic picture, which shows signs of weakness — particularly soft demand and rising unemployment.
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“It’s time to push inflation fears to the background,” Mendes told Yahoo Finance Canada. “Policymakers should focus on supporting the economy, especially with unemployment approaching seven per cent.”
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He argues that recent spikes in core inflation — which strips out volatile items to better capture underlying trends — were driven by temporary, one-off factors in the April Consumer Price Index (CPI) data, rather than sustained inflationary pressures.
Mendes identifies three key contributors to the April inflation surprise:
- Rents: Statistics Canada reported a sharp jump in rents, even as market-based asking rents were declining. Mendes notes that official rent data often lags market trends by six to nine months.
- Energy Margins: After the carbon tax was removed, energy providers raised prices, nullifying expected consumer savings. Mendes views this as a short-term adjustment.
- Tariffs: The inflationary impact of retaliatory tariffs peaked earlier this year, but by July, their influence had diminished to the lowest level since 2024.
“These temporary factors came together to inflate the April CPI,” Mendes said. “But now, three months later, it’s becoming clear that underlying inflation isn’t nearly as strong as initially feared.”
With inflationary pressures easing, Mendes believes the BoC will deliver more rate cuts than markets currently anticipate. This could push down short-term bond yields and money market rates, which have yet to fully price in further monetary easing.
However, he cautions that longer-term borrowing costs, such as mortgage rates, may not drop as significantly. This is due to global forces pushing up long-term bond yields, particularly higher term premia — the extra yield investors demand for holding long-term debt.
“The Bank of Canada can follow its own path with interest rate policy,” Mendes said. “But that doesn’t guarantee a drop in five- or 10-year bond yields — which are crucial for Canadian mortgage rates.”
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