No rush for Bank of Canada to raise interest rate even as inflation rate hits 3%, say economists

Canada’s inflation rate rose to three per cent in July. Photo by Postmedia

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Canada’s inflation rate in July rose to three per cent from 2.8 per cent the month before as gasoline prices spiked, but economists say the Bank of Canada is likely to look past this latest reading.

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Here’s what they say the data might mean for the economy and interest rates.

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‘Nothing to worry about’: CIBC

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The generally subdued readings for core inflation mean there’s no rush for the Bank of Canada to raise interest rates, said CIBC senior economist Andrew Grantham. He said policymakers have plenty of time to assess oil price fluctuations, how the tariff situation plays out and whether the rebound in economic activity we are currently witnessing can be sustained.

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The rate, driven by higher gasoline prices and airfares, shouldn’t be a concern to policymakers at the Bank of Canada, Grantham said.

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He noted that the acceleration in July could be partly unwound next month, with Statistics Canada suggesting that there was still an impact from the World Cup on fares to the U.S. in July.

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The headline reading was a tick higher than consensus expectations, Grantham said, and while there’s still plenty of uncertainty regarding future oil and gasoline price moves, so far average prices in August are tracking close to July’s level, which should see headline inflation hold at or close to July’s print.

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“Nothing to worry about,” he wrote on a note on Monday. Grantham said continues to forecast no change in the overnight rate until around mid-2027.

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Pockets of strength will prove temporary: Capital Economics

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While core prices rose at their strongest pace in almost a year in July, the key drivers were temporary factors and the annual rate remained at the Bank of Canada’s two per cent target, said Bradley Saunders, North America economist at Capital Economics.

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“The key message therefore remains that a soft inflation backdrop is providing an effective counterbalance to stronger activity and labour market data with regards to the path for interest rates,” said Saunders.

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He said “these pockets of strength” meant an average of the central bank’s preferred CPI-trim and CPI-median measures rose by 0.23 per cent in July – the strongest pace in almost a year. However, he said he doesn’t see cause for concern, given that most of the drivers will be temporary and the annual rate remained at the two per cent target.

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Not too concerned: TD Economics

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TD senior economist Leslie Preston said she expects the Bank of Canada’s core inflation measures to drift a little bit above two per cent in the coming months as higher energy costs pass through to other prices in the economy.

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“We aren’t too concerned that core inflation running slightly above two per cent should spook the BoC into raising interest rates,” said Preston, adding that the impact of travel on inflation should fade.

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The Bank of Canada has noted that the country continues to deal with the confidence shock of on-again-off-again tariff threats from the U.S., she said. Given there is no deal yet to avert the 50-per-cent tariffs set to come into effect on Aug. 19 this remains a clear downside risk to Canada’s economy.