Market-based probabilities of another Bank of Canada rate cut on July 30 have shrunk further in the wake of this morning’s inflation report, the last major economic indicator to be released before the bank’s decision.
Money markets now suggest only about a 6% chance of a quarter-point cut on that day after the bank’s next policy meeting, down from about 15% prior to the CPI report. Those probabilities for a rate cut had already been trending down since a surprisingly strong Canadian employment report for June was released earlier this month.
For their part, economists have also all but ruled out a rate cut at the end of this month in the wake of Tuesday’s data. Some have also scaled back their expectations for rate cuts for 2025 as a whole.
The market is now pricing in only about 17 basis points of monetary easing by the end of this year. That suggests it’ll be a bit of a toss-up whether another rate cut will be made at all over the course of this year.
Canada’s annual inflation rate rose to 1.9% in June, meeting analysts’ expectations, as increases in the price of automobiles and clothing and footwear pushed the index higher, data showed on Tuesday. The consumer price index was at 1.7% in the prior month. Statistics Canada said on a monthly basis the CPI increased 0.1%, matching analysts’ forecasts.
One of the core measures of inflation the CPI-median, or the centermost component of the CPI basket when arranged in an order of increasing prices, edged up to 3.1% in June, from 3% in the prior month. The other core measure CPI-trim, which excludes the most extreme price changes, was unchanged in June at 3% from May, Statscan said.
Here’s how implied probabilities of future interest rate moves stood in overnight swaps markets at 1120 am ET Tuesday morning, according to LSEG data. The overnight rate currently resides at 2.75 per cent. 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’s what they looked like before the data:
Here’s how economists and market strategists are reacting:
David Doyle, head of economics at Macquarie Group
Canada’s underlying inflation measures rebounded in June. Trim/median averaged +0.25% MoM and 3.05% YoY, a result that is likely to give the BoC some pause after the moderation in May. Notably, durable goods and semi-durable goods continued to accelerate YoY.
We expect an uneven moderation in underlying inflation ahead. Unemployment is elevated and private sector wage growth has moderated sharply. Shelter inflation is likely to continue to subside with low population growth a driver. The recent rebound in the Canadian dollar should also help alleviate pressure on import prices. …
Together with the strong labour market data for June released last week, this leads us to change our view on BoC policy. We now see two further cuts ahead (a total of 50 bps) with the next cut likely to come in October. Previously we had seen 75 bps of easing with the next cut in July.
Derek Holt, vice president of Capital Markets Economics, Scotiabank
It’s just the latest piece of evidence to keep the Bank of Canada on hold after 83,000 jobs (added in June) and no clarity on how fiscal policy and trade policy will evolve. I can’t see the bank doing anything for a while here. You are still getting these core measures well above the comfort zone and their target range. Everything aligns in keeping the Bank of Canada on hold in my opinion.
Doug Porter, chief economist at BMO Capital Markets
Canada’s June CPI was broadly as expected, if not even a touch below, at 1.9% on headline and 3.1% on the median. But in the current situation, as-expected is not mild enough to prompt the Bank of Canada off the sidelines in July. We are now pencilling in rate trims in the September, December and March/26 meetings. If Ottawa manages to arrange a trade framework with Washington in the meantime, we would likely pull one of those cuts. The market is even more skeptical about further rate trims— it’s not even fully priced for an additional 25 bp move. The simple issue is that core CPI remains seemingly stuck around the 3% mark. Two key drivers are the still-strong shelter component, and the up-and-coming durable goods group. The latter is being lifted by vehicles, furniture, sporting equipment and jewelry (Durable? Well diamonds are forever.) Most are likely being pressured by the trade fight and domestic retaliatory tariffs. Looking ahead, we expect shelter to grind lower from here, and it may well become an important source of disinflation in coming years, while durable goods strength may wane if spending cools and/or a trade truce can be arranged.
Veronica Clark, economist at Citi
Headline CPI rose 0.1%MoM and 1.9%YoY in June, in line with consensus expectations but a bit stronger than our forecast. Core measures are still averaging above the target range at 3.05%, which will likely keep BoC officials on hold this month. But details of June inflation data do not leave us more concerned about fundamental stickiness in core inflation. Most importantly, shelter inflation should continue easing as home prices fall and slowing population growth implies less upward pressure on rents. Softer demand generally, with soft discretionary services prices in June should continue to weigh on inflationary pressures. We now expect the BoC to resume rate cuts in September.
Thomson Ryan, North America economist, Capital Economics
The above-target monthly gains in CPI-trim and CPI-median in June means the door is now firmly slammed shut on a July rate cut from the Bank of Canada, leaving the three-month annualised pace of those averaged measures holding uncomfortably high at 3.5%. … Although headline inflation remains below the 2% target, it remains the case that this is mostly thanks to the removal of the carbon tax in April. Excluding energy, CPI inflation held steady at 2.7% last month. …
Given the broad-based price increases, the average of the CPI-trim and CPI-median core measures rose by a hotter 0.3% m/m in June – albeit a “soft” 0.3% as the average gain was 0.25%. This pushes the three-month annualised rate – which the Bank watches closely – to a six-month high of 3.5%. All in all, elevated core inflation suggests cost pressures persist in the economy, likely driven by the earlier depreciation of the loonie and the impact of retaliatory tariffs. This reinforces the Governing Council’s bias toward keeping policy in the neutral range rather than easing further, posing a risk to our forecast of two additional rate cuts this year –more than markets currently expect.
Royce Mendes, managing director and head of macro strategy, Desjardins
There was some evidence of tariffs pushing up consumer prices in June. Clothing and personal care goods prices rose significantly, as did furniture prices. Auto prices also rose again, although not as much as they did in the prior two months. That said, there was strength observed in services too, with core-services excluding shelter prices rising 0.25%. Overall, price growth was relatively broad based, with the distribution across categories fairly normal.
In combination with the surprising strength in employment, the June inflation data suggest that the Bank of Canada will likely remain on the sidelines later this month. That said, we still expect slower population growth, mortgage renewals, and weak business investment to lead the central bank to resume its rate cutting cycle in September.
Dustin Reid, chief strategist, Fixed Income at Mackenzie Investments
Despite headline inflation remaining relatively well-behaved and close to the Bank of Canada’s target band midpoint, core inflation is frothy enough to keep the Bank from easing rates in July and possibility in September, particularly given the strength of Canada’s most recent labour market report. The Bank of Canada will not want to ease into higher core inflation, particularly as the Bank believes core CPI is a good directional predictor of where headline inflation is heading.
Abbey Xu, economist, Royal Bank of Canada
We continue to expect Canada’s restrained approach to retaliation to tariffs from the U.S. administration will limit the impact of the trade war on Canadian consumer prices. But firmer price growth among domestically produced and consumed services comes alongside a June labour market rebound, improved business sentiment, and resilient consumer spending trends. While downside risks to economic growth persist, recent data is consistent with our base-case view that the Bank of Canada will not cut interest rates again this cycle, having opted to skip cuts at its last two meetings.
Matthieu Arseneau, deputy chief economist, National Bank Financial
In light of this morning’s data, it is even more likely that the Bank of Canada will remain on the sidelines in July, especially since private employment is showing signs of recovery, according to the LFS survey in June. While the Canadian economy was certainly weakened in the first half of the year by tariff uncertainty, as evidenced by the decline in GDP in April and May and the unemployment rate rising by three-tenths of a percentage point from February to June, this has not yet resulted in lower inflationary pressures. We continue to believe that monetary accommodation will be necessary by the end of the year, as we remain sceptical about the improvement in the labour market reported by the LFS despite ongoing tariff uncertainty. This is a survey that can sometimes be highly volatile. Latest business surveys indicate that the risks of contraction remain high.
Various measures of wage inflation suggest that the current inflationary pressures could ease. Furthermore, rents, which were still rising sharply in June, are also expected to moderate over the next 12 months, as evidenced by the decline in asking prices. Overall, it can take time for economic weaknesses to be reflected in inflation, and this is probably the case at the moment.
Robert Embree, senior economist, Rosenberg Research
Canada’s CPI numbers will be slightly discouraging for bond bulls, as several core measures ticked up — but we still see a disinflationary trend incoming for the rest of the year. Despite the strong jobs report on Friday, wage growth continues to moderate. Even with unemployment falling last month, the unemployment rate remains well above neutral and the output gap has been growing this year. This output gap means that any new inflation from tariffs will hit a wall in the labor market — so we feel safe being Canadian bond bulls even with this bump in the road.
Michael Davenport, senior economist at Oxford Economics
There were signs of upward pressure on consumer prices from tariffs last month, but the impact appears to be marginal so far. StatCan attributed the jump in year-over-year clothing price inflation in June to “trade uncertainty” amid higher costs from tariffs, but upward pressure on durable goods prices likely also reflects tariff-related factors. However, food price inflation slowed 0.5ppts to 2.9% y/y in June despite ongoing Canadian counter tariffs on US food products.
With trade policy uncertainty still near an all-time high and core price pressures likely too firm for the BoC to be confident that underlying inflationary pressures are contained, we expect the BoC will continue to hold the overnight rate steady on July 30th.
Andrew Hencic, director and senior economist, TD Economics
Healthy core price growth, coupled with last week’s surprisingly robust employment gains now make a July cut from the Bank of Canada unlikely. However, renewed trade threats add to the uncertainty that has lingered over the economy since the start of the year. Looking forward, the course of trade negotiations and evidence of whether June’s healthy labour market report was a one-off, or the start of a new trend, will be crucial. Ultimately, we believe that absent a quick resolution on trade, the economic backdrop should give the BoC space to deliver more easing this year.
Ali Jaffery, senior economist, CIBC
On the heels of a good job report and somewhat firm price pressures, we expect the BoC to remain on pause in July because this is a central bank that by its own admission isn’t very comfortable being forward-looking. Waiting until the fall will give them more time to observe cost pressures, the response of the economy to tariffs and the uncertainty shock, and perhaps most important, to have a clearer picture of Canada’s tariff outcome.
Philip Petursson, chief investment strategist, IG Wealth Management
How much of the recent price increase is a consequence of tariffs remains to be seen. Meanwhile, shelter cost inflation has been easing but remains elevated at 2.9% year-over-year. Shelter should continue to be less of a driver of inflation going forward as the base effects from the interest rate increases of prior years fades. This report however, does not give the Bank of Canada the green light to cut its overnight rate in July. In fact, we believe the direction for inflation is higher through the back half of the year – which will keep the Bank on the sidelines. Modelling out inflation through the remainder of 2025 shows an upward trend back towards 3%. Further tariff pressure will only compound that number. This is the challenge the BoC has. The higher inflation is more of a math/base effect problem than an inflation problem. As we drop off the flat/negative month-over-month inflation prints of last year (August, September, November and December) even factoring a modest increase in month-over-month inflation of 0.1% will push the yoy print towards 3%. Nonetheless, should the Bank hold firm on its inflation commitment, the likelihood of an additional rate cut falls further and further away. The Governing Council would have a difficult time justifying an additional rate cut given sticky (and higher) inflation, alongside the better-than-expected June jobs report. “Do nothing” is the higher probability path forward. The takeaway for investors is that Government of Canada bond yields are likely to push higher while the recent loonie strength is likely to remain in place, for now.
Charles St-Arnaud, chief economist, Alberta Central
Today’s CPI number confirms that the BoC will be on hold at the July meeting, as inflation will remain a worry. Moreover, the rebound in the labour market in June, improvements in business and consumer confidence, and the reduction in economic uncertainty suggest the Canadian economy is no longer deteriorating and is likely stabilizing. Hence, the BoC can afford to be patient and to receive more information before acting.
With files from Reuters