As Canada’s inflation rate edged up slightly in June, economists predict the Bank of Canada will hold off from cutting interest rates this month suggesting Canadians continue to face underlying price pressures in the economy.
Statistics Canada’s consumer price index (CPI) reading was 1.9 per cent in June, the agency said on Tuesday, up from the 1.7 per cent in May. The Bank of Canada’s preferred core measures of inflation meanwhile, hover around three per cent, which is higher than experts expected .
“The Bank of Canada... is in a little bit of a tight spot here, because, on the one hand, you’ve got a weak economy, and you’ve got a labour market that’s definitely in a slack,” Vinayak Seshasayee, executive vice president and portfolio manager at PIMCO told BNNBloomberg.ca in a Tuesday interview. “Of late, these core inflation numbers have not been cooperating quite as much as they would have liked to see… I think on the margin, these numbers probably suggest that the Bank of Canada is likely to hold policy rates in their July meeting.”
The central bank held its policy rate in its last two meetings citing trade uncertainty with U.S. President Donald Trump. The June numbers mark the final look the Bank of Canada will get at price data before its next interest rate decision on July 30.
StatsCan said the hike was due in part to consumers paying more at car dealerships while gasoline prices were nearly unchanged as higher crude oil prices and geopolitical conflicts ratcheted up pressure at the pumps. Motorists saw a steeper monthly decline in prices this time last year, which the agency said led to a rise in headline inflation.
Seshasayee expects the bank to cut rates two more times likely in the fourth quarter of the year. He attributes the current acceleration in core inflation to the Canadian dollar making up for losses last year and shelter inflation – costs associated with housing – declining as real estate markets continue to slump.“
“We had a pretty meaningful depreciation in the Canadian dollar for a sustained period last year and into the beginning of this year,” said Seshasayee. “We think we’re seeing some of that pass into prices of core goods and services, and because we’ve seen the Canadian dollar reverse and get stronger more recently, as we get towards the end of the year, we think some of that pressure will subside. The other thing is, we do expect to see shelter inflation further catch down. We are seeing a little bit of a divergence in real market, shelter inflation, as evidenced by housing prices, rents, versus what we’re actually seeing in the CPI.”
The Chartered Professional Accountants of Canada also expect the bank to hold interest rates steady later this month. David-Alexandre Brassard, chief economist says the headline number masks underlying challenges.
“Core inflation has remained stubbornly above target, driven in part by supply chain pressures tied to ongoing tariffs,” he said in a news release. “But the bank is weighing that against broader economic resilience.”
In the housing sector, he said price corrections have been mostly concentrated in the country’s priciest cities, such as Toronto and Vancouver, while most other regions remain relatively stable.
“This reinforces the view that there’s no urgent need for the Bank of Canada to adjust its policy stance,” he said. “Taken together, the inflationary pressure, resilient labour conditions and region-specific housing slowdown all point toward a rate pause.”
Seshasayee says he has not seen how tariffs will affect the economy yet as much remains unclear, but expects to see the impact on inflation in a couple of months.
“Tariffs are a moving target,” Seshasayee. “Really, we’re still kind of figuring out what the final level of tariffs will be. There’s another level of tariffs that’s slated to go on in August. So, we do think there’s a limit to how much companies can really hold off passing through some of these price increases to consumers.
Claire Fan, senior economist at RBC Capital Markets, meanwhile said the CPI was bang on consensus but noted mixed signals in inflation data.
“Data essentially is telling us that there are some early impacts that we’re already seeing from tariffs that have been pushing certain categories like clothing and footwear higher,” Fan told BNNBloomberg.ca on Tuesday. “But outside of that, broadly underlying pressures are also building.”
Statistics Canada said clothing and footwear prices accelerated in June noting prices for clothing and footwear rose two per cent year over year after increasing 0.5 per cent in May.
Uncertainty surrounding international trade put upward pressure on prices for clothing and footwear in June, as the industry faced higher costs amid tariffs.
Inflation also rose in the United States as Trump pushes for tariffs on the cost of goods for Americans. For Canadians, Fan said the threat has driven consumer prices higher as Canadians are pressured towards buying local products reflective in inflation data, particularly the central bank’s core measure.
“We see the so-called Bank of Canada super core measure, which is essentially a gauge for how the underlying consumer pressure induced inflation pressure is and essentially that’s been pretty robust,” said Fan. “We’re resilient, still hovering above the Bank of Canada’s one to three per cent target range.”
She anticipates the central bank will hold its policy rate citing an upside in June employment numbers along with inflation data.
“Our current view on sort of the overnight rate in Canada is that it’s going to be maintained at the 2.75 per cent it is today, pretty much throughout this current rate cycle,” said Fan. “We think the Bank of Canada is still cutting rates. And with just the mix of data releases over the last week or so, we saw, you know, quite an upside surprise in June, employment data with the unemployment rate actually taking lower to 6.9 per cent so the mix of that with…Inflation data that we’re seeing today are quite inducive to our call, essentially, for the Bank Canada to be on hold”.
