Loonie weakens as subdued inflation reduces rate hike chances

Mexico's central bank has raised its benchmark interest rate a quarter-point to 7 percent in an effort to limit inflation.

The bank is expecting that inflation will gradually increase to the 2.0% area as spare capacity within the economy is gradually eroded over the next few months.

Food prices have fallen in the past year, contributing to a cooling rate of inflation, Statistics Canada says. In a poll from last week, analysts had projected one more 25 basis-point increase this year.

The latest consumer price index also showed lower readings for two of the Bank of Canada's three preferred measures of core inflation, which the central bank will scrutinize ahead of its interest rate decision.

Canadian consumer prices rose 0.1% for May following a 0.4% gain the previous month and lower than consensus forecasts of a 0.2% gain on the month.

In a speech this month, Bank of Canada Senior Deputy Gov. Carolyn Wilkins said below-target inflation was expected given the unused labor and industrial capacity, or slack, that built up in the economy.

The policy rate is unlikely to rise any further from here, Capital Economics' Adam Collins said.

The level reached in the reference rate is congruent with the process of efficient convergence of inflation toward the 3 percent objective, the central bank said in a statement.

Putting a damper on price increases was a 5.5% year-over-year drop in electricity costs. Still, food price declines have been moderating in recent months and the cost of fresh vegetables rose for the first time since August 2016. Statistics Canada said this was largely attributable to a move by the government of Ontario - Canada's most populous province - to legislate lower power prices for households. Health and personal care costs declined 0.1% on the month while clothing prices rose 0.5%.

Meanwhile, gasoline prices rose 6.8% from May of a year ago, although that was slower than the previous month's almost 16% gain.

  • Zachary Reyes