Key Takeaways
- Lower gasoline prices and higher OPEC+ oil production pushed inflation lower.
- Inflation moderation strengthens the case for resuming interest rate cuts, but more supportive data is needed.
- Some analysts still believe the Bank of Canada’s monetary easing may have run its course.
Canada’s Consumer Price Index eased in July after rising the month before, stoking expectations of an interest rate cut by the Bank of Canada at its September meeting. According to the latest Statistics Canada report, annual inflation decelerated to 1.7% in July from 1.9% the month before, undershooting the FactSet consensus estimate of 1.8%.
If this moderation in inflation continues, it could likely provide the central bank with justification for resuming monetary easing at its Sept. 17 meeting. The CPI report showed the index rose 0.3% on a monthly basis.
The reversal of the inflation trend has led analysts to raise their expectations for a rate cut. But two key economic data scheduled for release ahead of the Bank’s next meeting will be pivotal in shaping policymakers’ decision.
Lower Gas Prices and Higher OPEC Supply Depress Inflation
The July slowdown was led by a 16.1% annual decline in gasoline prices, resulting from the removal of the consumer carbon tax. A drop in the crude oil price, prompted by the ceasefire between Iran and Israel in June and increased OPEC output, further contributed to the decline.
Although core inflation remained largely flat for the month, it continued to hover around the upper bound of the Bank of Canada’s preferred range of CPI. One of the Bank’s preferred core measures, the CPI median, edged slightly higher to 3.1% in July from 3.0% in June, while the other measure, CPI trim, remained steady at 3.0%.
Core inflation strips out the more volatile components of the CPI basket of goods, offering a clearer view of price trends. Economists note that the inflation data, coupled with a sharp contraction in jobs data and a softer GDP earlier this month, likely boost odds for the resumption of interest rate cuts by the central bank.
However, the next inflation report (due on Sept. 16, a day before policymakers meet) could be key to the Bank’s rate decision. The central bank has held its policy rate steady at 2.75% at its last three meetings after cutting in January and March.
Following the report, traders in overnight swaps modestly increased the odds of a rate cut to 38% from 32% before the release.
The Canadian dollar fell to 1.3834 against the US dollar, or 0.72 US cents, while the S&P/TSX Composite Index edged higher by 34 points, or 0.12%, to 27,956.47 soon after the report.
The following are excerpts from analyst notes on the July CPI report.
The Bank Will Remain in Wait-and-See Mode
Charles St-Arnaud, chief economist at Alberta Central
“Overall, the report suggests that headline inflation remains low but that underlying inflationary pressures remain elevated despite some easing. As such, the Bank of Canada is to remain concerned by its preferred measures of inflation remaining above 3%. The Bank of Canada is currently placing more emphasis on current inflation than on the amount of slack in the economy. Today’s CPI number suggests that the Bank will continue its wait-and-see approach and keep its policy rate on hold at the September meeting. It would require significant deterioration in the economy for the Bank of Canada to cut its policy rate.”
Slowing GDP and Easing Inflation Could Open Door to Rate Cut
Douglas Porter, chief economist at BMO Economics
“There were no big surprises in the July inflation report, but we probably need a downside surprise at this point to prompt the Bank of Canada off the sidelines … both trim and median have risen precisely 0.2% in each of the past three months, holding the yearly rate almost bang on the 3% mark.
“However, there is a morsel of goods news there, as that also means the three-month trend in each has calmed to a reasonable 2.4% annualized pace. (This fits with the MPR’s contention that underlying inflation is close to 2.5%, and both the ex-food & energy and the ex-gasoline CPI were also right at that mark in July.) If that more recent pace in core is maintained, and the economy remains soft, we believe that will eventually set the stage for Bank of Canada cuts.”
July Data Supports a Quarter-Point Cut
Andrew Grantham, senior economist at CIBC Capital Markets
“An easing in inflationary pressures during July means that we have successfully cleared one obstacle on the path towards a potential September interest rate cut. While there is still a lot more data to be released between now and the mid-September Bank of Canada meeting (including another CPI release), today’s release is supportive of our current call for a 25-basis-point reduction at that time.”
Bank of Canada Might Resume Easing in September
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“The latest inflation numbers reinforce our thesis that many tariff-related price increases occurred in March and April, earlier than the Bank of Canada has been assuming. These readings suggest that neither goods nor services price growth should keep monetary officials from delivering further easing.
“We continue to expect that the Bank of Canada will resume its rate cutting cycle in September. Market participants are still underpricing the likelihood of such an outcome, with a handful of other analysts forecasting the central bank will remain on hold for the remainder of the year. While Government of Canada bonds yields are lower on the day, we believe there’s still room to price in more Bank of Canada rate cuts for 2025.”
Unemployment Rate a Bigger factor in the Bank’s Policy Path
Jocelyn Paquet, economist at the National Bank of Canada
“Regarding how today’s report may influence monetary policy, we believe that, while the Bank of Canada will likely view it as mildly positive, it is unlikely to be a gamechanger. As such, we believe that the Bank of Canada will only be confident enough to cut policy rates again this year if the unemployment rate continues to rise, which is our baseline scenario.”
The Bank Will Hold Steady Again in September
Michael Davenport, senior Canada economist at Oxford Economics
“Underlying inflation likely remains too firm for the Bank of Canada to be comfortable cutting rates in September. We expect both headline and core CPI inflation will continue to creep up in the near term as costs from the trade war and Canadian counter tariffs gradually pass through to retail prices, particularly once most temporary counter tariff relief ends in mid-October.
“There’s still about a month until the Bank of Canada’s next interest rate decision, and it will have plenty more data to digest before then. With trade policy uncertainty still elevated and underlying inflation running too hot for the Bank of Canada’s liking, we expect it will continue to hold the policy rate steady at 2.75% on Sept. 17.”
The Bank Is Done Cutting Rates
Claire Fan, senior economist at Royal Bank of Canada
“Those rates of price increases are smaller than what we expected - we had looked for persistent strength in services components to again show up, echoing resilience seen in consumer spending broadly to-date. Still, one reading doesn’t make a trend and the diffusion index we calculate is still pointing to relatively broad-based inflation pressures across the consumer spending basket in July.
“From the Bank of Canada’s perspective, the easing this month is welcome. However, they have also already cut interest rates significantly over the last year and will need to consider the potential impact of expected government spending increases as a more effective policy response to US tariffs than further changes in interest rates. Labor markets in Canada have softened but as we look not much further for a bottom of conditions, we don’t expect the Bank of Canada will cut again in this cycle.”
It Would Take More for the Bank to Budge on Rates
Derek Holt, vice president and head of capital markets economics at Scotiabank
“It’s just one set of readings ahead of a lot of further information on the road to the next Bank of Canada decision. That’s probably why the market reactions were fairly muted. There are also serious questions to be raised regarding data reliability.
“The Bank of Canada couldn’t base further easing from what is already a roughly neutral policy rate on such numbers in my opinion. They would either need more evidence of downside risk to inflation tracking that may or may not arrive with further data, or high confidence in their ability to forecast price pressures which doesn’t seem to be in vogue at the Bank of Canada that continues to avoid a base case projection.”
State of the Economy Inches Closer to the Bank’s Rate Cut Scenario
Andrew Hencic, director and senior economist at TD Bank
“All together, this looks like the scenario the Bank of Canada highlighted as giving rise to the need for a further reduction in the policy interest rate. From our lens, we think the Bank of Canada will have room to deliver more easing later this year as the economic slack continues to build and offset inflation pressure.”
