Money markets are pricing in modestly higher odds that the Bank of Canada will cut interest rates at its next policy meeting in September following this morning’s consumer price index report. Some economists also suggest a rate cut is now looking more likely.
Canada’s annual inflation rate eased to 1.7 per cent in July from 1.9 per cent in the prior month as lower year-on-year gasoline prices kept the consumer price index low, but core measures of inflation stayed sticky. Analysts polled by Reuters had forecast the annual inflation rate at 1.8 per cent and the monthly inflation rate at 0.3 per cent. The CPI increased by 0.3 per cent in July from 0.1 per cent in June on a monthly basis, Statistics Canada said.
Inflation rate eases to 1.7 per cent in July, core measures stay firm
One of the core measures the CPI-median – or the centremost component of the CPI basket when arranged in an order of increasing prices – was at 3.1 per cent in July, from 3 per cent in June. The CPI-trim, which excludes the most extreme price changes, was unchanged at 3 per cent.
In a signal the inflation report has traders bracing for the possibility of a rate cut in the near term, the Canadian dollar weakened and lost nearly a quarter of a cent after the data, last trading at 72.27 cents US. Two-year government bond yields, which are sensitive to Bank of Canada policy moves, fell about two basis points, to 2.715 per cent.
Money markets are now pricing in odds of a rate cut on Sept. 17 at about 38 per cent, up from 32 per cent prior to the data, according to LSEG data. They are also still pricing in a full quarter point rate cut by the end of this year. The Bank of Canada has stayed put at 2.75 per cent at its last three rate decision meetings.
Here’s how implied probabilities of future interest rate moves stood in swaps markets moments after the 8:30 a.m. data, according to LSEG data. While the bank moves in quarter-point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
Here is how economists are reacting in written commentaries this morning:
Royce Mendes, Managing Director & Head of Macro Strategy, Desjardins
For the third month in a row, inflationary pressures looked relatively benign in Canada. Headline prices rose 0.30% in July, leaving the annual rate slowing from 1.9% to 1.7%. Excluding indirect taxes, a measure the Bank of Canada is watching since it doesn’t include the impacts of the carbon tax elimination, inflation slowed from 2.5% to 2.2%. Other stripped down measures of inflation also looked muted. Prices excluding food and energy rose just 0.065% in seasonally-adjusted terms in July. As a result, the year-over-year pace of price growth for that metric slowed down to 2.5% from 2.6%.
The Bank of Canada’s preferred core indicators of underlying inflation also looked cool. While the average annual rate of the trimmed-mean and median measures printed at 3.1%, that’s largely because of the April reading, which we’ve pointed out looks like a huge outlier. The average three-month annualized rate for those two metrics, which no longer includes the April print, decelerated to 2.4% from 3.4% in June.
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. More recent price readings suggest that price growth in some of those categories is now normalizing. Core goods prices rose just 0.06% in July, the weakest print since December of last year and core services excluding shelter prices were up just 0.16%. 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 in terms Bank of Canada rate cuts for 2025.
Bradley Saunders, North America Economist, Capital Economics
July’s generally soft core price data, combined with favourable downward revisions to previous months’ figures, leave the three-month annualized average rate of CPI-trim and CPI-median at a more modest 2.4%. This means a September rate cut is certainly on the cards, though policymakers will probably want to see further signs of a sustained economic slowdown in forthcoming GDP and labour market data before they commit. …
The generally soft price data meant an average of the CPI-trim and CPI-median core measures rose by 0.18% m/m in July. Combined with favourable revisions to previous months’ data, this leaves the three-month annualized rate (which the Bank of Canada watches closely) at 2.4%. While that is still above the Bank’s target, much of the recent strength can be attributed to factors that are likely to be temporary, including Canada’s retaliatory tariffs. The modest three-month annualized rate raises the chance that – as we expect – policymakers opt to resume easing at next month’s meeting. … That said, we are wary of the hawkish comments published in the Summary of Deliberations from July’s meeting last week and will need to see greater evidence of a sustained economic slowdown in the forthcoming GDP and labour market data, due before the Bank next meets, before we can be sure.
Douglas Porter, chief economist, BMO Capital Markets
There were no big surprises in the July inflation report, but we probably need a downside surprise at this point to prompt the BoC off the sidelines. … Note the incredible stability of core trends in seasonally adjusted terms —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 BoC cuts.
Michael Davenport, senior Canada economist at Oxford Economics
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 BoC’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 BoC’s liking, we expect it will continue to hold the policy rate steady at 2.75% on September 17.
Andrew Hencic, director and senior economist, TD Economics
Energy prices continue to do the heavy lifting on the top-line measure, but the softer trend in core inflation is what really jumps out from this report. The monthly pattern is suggestive of an economy where prices pressures are increasingly offset by growing economic slack.
On a go-forward basis this report builds on what we saw last month, slowing momentum in core prices as slack in the economy builds. Between February (when trade tensions really flared) and July the economy has added a total of 27k jobs, and now core inflation appears to be losing steam. All together this looks like the scenario the BoC highlighted as giving rise to the “need for a further reduction in the policy interest rate”. From our lens, we think the BoC will have room to deliver more easing later this year as the economic slack continues to build and offset inflation pressure.
More to come
With reports from Reuters