Economists see signs that the central bank faces a tougher challenge than markets realize
The Bank of Canada’s next interest rate decision will not depend solely on Tuesday’s July inflation data, as persistent underlying price pressures suggest the central bank faces broader challenges than one monthly reading can resolve, according to Scotiabank analysis.
While markets await the consumer price index report, economist Derek Holt emphasized that policymakers will have two inflation readings before their September 17 decision, reducing the significance of the July data alone.
Analyst highlights persistent core inflation concerns
Holt’s analysis revealed troubling trends in the Bank of Canada’s preferred inflation measures that extend beyond any single monthly reading. The core inflation indicators have averaged 3.4% month over month seasonally adjusted annual rates over the past three months.
“What will matter, however, is what will happen to the average of the two preferred core inflation readings used by the BoC that have remained hot and are impossible to estimate in m/m SAAR terms,” Holt noted, suggesting the persistence of underlying price pressures presents a more fundamental challenge than short-term fluctuations.
The Scotiabank economist identified several factors sustaining these pressures: service price inflation has been trending warmly, the breadth of price pressures has been rising, and tariff effects are emerging both directly through Canada’s retaliatory measures and indirectly through supply chain disruptions.
“The core measures exclude tariffs, but not the possible pass-through incidence effects,” Holt observed, indicating the complexity facing policymakers extends beyond headline numbers.
Holt’s assessment suggests the Bank of Canada’s decision framework involves broader economic considerations rather than reacting to individual data points, particularly given the ongoing uncertainty around trade policy impacts.
RBC sees limited policy implications from single reading
RBC Economics echoed the view that July inflation data alone won’t drive monetary policy decisions, though they focused more on the underlying trends than the timing of data releases.
The bank expects headline inflation to hold at 1.9% year over year, matching June’s reading, while the Bank of Canada’s preferred core measures are forecast to remain at approximately 3% year over year, “still at the top end of the BoC’s 1% to 3% target range for inflation.”
RBC’s analysis suggests the persistence of elevated core inflation reflects resilient domestic demand, with their card transaction tracking indicating continued consumer spending strength in July. Food prices affected by retaliatory tariffs likely remain about 3% above year-ago levels.
“We expect these trends continued in July,” RBC economists said, suggesting ongoing rather than temporary price pressures.
Policy stance likely to remain unchanged for now
Both institutions’ analyses support expectations that the Bank of Canada will maintain its current 2.75% benchmark rate. RBC explicitly stated: “We continue to expect the BoC will maintain current interest rates given limited further deterioration is expected in the labour market, additional fiscal stimulus will offset tariff impacts, and inflation is running at the upper limit of the central bank’s target range.”
The central bank has signalled openness to rate cuts only if trade disruption effects on prices are contained, conditions that current analysis suggests have not yet been met.
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