Latest inflation numbers slam door ‘shut’ on Bank of Canada July rate cut, say economists

Pedestrians walk past the Bank of Canada in Ottawa, Ont. Photo by DAVE CHAN/AFP via Getty Images files

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Rising inflation in June is solidifying economists’ calls that the Bank of Canada will stay on the sidelines at its next interest rate meeting on July 30 and increases doubt about a possible cut at its September meeting.

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The consumer price index (CPI) rose 1.9 per cent in June, according to Statistics Canada on Tuesday, which matched analysts’ estimates, but that’s up from a 1.7 per cent increase in May.

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Inflation remains below the Bank of Canada target rate of two per cent, but some economists attribute that to the cancellation of the consumer carbon tax in April. However, they also said there are signs that retaliatory tariffs are increasing prices.

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Here’s where economists think inflation and the Bank of Canada are headed over the second half of the year.

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‘Cost pressures persist’: Capital Economics

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“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,” Thomas Ryan, North America economist at Capital Economics Ltd., said in a note.

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For example, CPI excluding gas held steady at 2.7 per cent in June, just under the top end of the Bank of Canada’s target range for inflation of one per cent to three per cent.

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But the Bank of Canada’s preferred measures of inflation — core CPI trim and CPI median — have remained stubbornly higher than policymakers would like. Trim held at three per cent in June, but median rose to 3.1 per cent.

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“This pushes the three-month annualized rate — which the Bank (of Canada) watches closely — to a six-month high of 3.5 per cent,” Ryan said.

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He said retaliatory tariffs pushed up prices for clothing and footwear and health and personal care.

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“The door is now firmly slammed shut on a July rate cut from the Bank of Canada,” he said, with a September cut looking “shaky.”

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Capital had been calling for two more rate cuts this year.

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‘Stubbornly stuck’: BMO

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“The major measures of core inflation both remained stubbornly stuck right around three per cent,” Douglas Porter, chief economist at BMO Capital Markets, said in a note, adding that the share of goods in the CPI basket that remain elevated hasn’t continued to improve, either.

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He said it’s hard to square why core inflation remains so “sticky” given that Canada’s economy is slowing, but attributed it to shelter inflation “receding only gradually” and tariffs.

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Rent inflation accelerated in June and mortgage costs were up 5.6 per cent year over year, while tariffs are applying pressure on the price of goods such as vehicles, clothing, footwear and furniture, he said.

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“The quick read is that the overall report really gives the Bank of Canada no opening to cut interest rates at the upcoming meeting on July 30,” Porter said, adding that core inflation would need to “materially” cool for a September rate cut to be “in play.”