The annual pace of inflation slowed last month, although economists still see some challenges ahead
Canada’s cooling inflation in July has raised expectations that the Bank of Canada could resume interest rate cuts in September, particularly as the US Federal Reserve prepares to ease monetary policy. But economists remain split on whether conditions are weak enough to warrant further action.
Consumer prices rose 1.7% year over year in July, Statistics Canada reported Tuesday, down from 1.9% in June. The slowdown was largely driven by a 16.1% drop in gasoline prices compared with a year earlier. Excluding gasoline, the consumer-price index climbed 2.5%, matching increases in May and June.
Market reaction was swift. Following the data release, traders priced in a 40% probability that the Bank of Canada will lower its benchmark rate by 25 basis points at its September meeting. That marked an increase from roughly one-third odds prior to the report.
Economists said July’s figures cleared a hurdle for easing but warned more information will be needed. “We have successfully cleared one obstacle on the path towards a potential September interest rate cut,” said Andrew Grantham, senior economist at CIBC Capital Markets. “While there is still a lot more data to be released between now and mid-September, today’s release is supportive of our current call for a 25-basis-point reduction at that time.”
Andrew DiCapua, principal economist at the Canadian Chamber of Commerce, told the Wall Street Journal that “if this momentum continues, we could see the Bank of Canada move rates lower in September,” though he cautioned that tariffs could still push consumer prices higher.
Others argue inflation remains too high for a move next month. Michael Davenport, senior Canada economist at Oxford Economics, told Financial Post that “underlying inflation likely remains too firm for the Bank of Canada to be comfortable cutting rates in September.” Royal Bank of Canada senior economist Claire Fan noted that “one reading doesn’t make a trend,” highlighting that broad-based inflation pressures persist.
Labour market weakness may tip the balance. Canada shed 41,000 jobs in July after a strong gain in June, pushing unemployment near 7%. Desjardins macro strategist Tiago Figueiredo told Morningstar the data show “plenty of slack,” adding, “I don’t see conditions improving enough to give policymakers a reason not to cut rates.”
The Bank of Canada has held its policy rate at 2.75% for three consecutive meetings, after multiple cuts earlier in the year. With inflation moderating and uncertainty growing, the central bank is expected to weigh domestic data more heavily than moves by the Fed.
“Policymakers will probably want to see further signs of a sustained slowdown in forthcoming GDP and labour market data before they commit,” Bradley Saunders, North America economist at Capital Economics, told Financial Post.
The central bank’s next decision is scheduled for September 17.
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