June Inflation Report Dims Hopes for Rate Cut
Canada’s core inflation held firm in June, adding pressure to the Bank of Canada to maintain its current interest rate later this month. Despite earlier optimism from some market watchers, the latest figures indicate that a rate cut is unlikely—at least for now.
Statistics Canada reported a 1.9% rise in annual inflation for June, up slightly from May’s 1.7%. While this jump matched forecasts, it still signals persistent cost pressures that could keep policymakers cautious.
Durable Goods and Gas Prices Fuel Price Rise
Much of June’s inflation came from durable goods like motor vehicles, as well as relatively stable gasoline prices, which didn’t dip as hoped. Core inflation—closely monitored by the Bank of Canada—remained near 3%, a level economists describe as “a little too hot.”
Doug Porter, BMO’s Chief Economist, noted that Canada’s economy has shown unexpected strength, helping businesses pass rising costs onto consumers. “The economy has proven a bit more resilient than expected,” he said.
Rate Hold All But Certain for July
With inflation sticking and the economy holding steady, economists believe the Bank of Canada will leave its 2.75% policy rate unchanged at its July 30 meeting.
“The Bank has stayed on the sidelines for two straight meetings, and they’ll likely do it again,” Porter explained.
The inflation update follows another surprise: Statistics Canada reported 83,000 new jobs in June, which nudged the unemployment rate down to 6.9%. That labor strength further weakens the case for a rate cut.
Markets Scale Back Rate Cut Bets
Financial markets responded swiftly. The chance of a quarter-point rate cut in July fell from 13% to just over 5% after the inflation data was released, according to LSEG Data & Analytics.
Still, some economists expect cuts in September and December, though confidence in the September move is waning.
Ali Jaffery of CIBC said the Bank of Canada may prefer to wait until fall, allowing time to observe how tariffs, inflation trends, and economic uncertainty evolve.
Inflation Details: Mixed Signals in Prices
While headline inflation rose, some price categories showed easing.
Gasoline prices remained flat in June, unlike the steep drop seen last year.
Food inflation cooled to 2.9%, thanks to cheaper fresh vegetables.
Shelter costs also dipped slightly, with inflation falling to 2.9%.
However, certain goods saw notable price hikes:
Passenger vehicle inflation jumped to 4.1%, up from 3.2% in May.
Used car prices rose for the first time in 18 months due to tighter supply.
Clothing and footwear became more expensive, partly due to tariffs.
Base-Year Effect and Exchange Rate in Play
One reason inflation appears hotter is the base-year effect, where last year’s significant price drops distort current year-over-year comparisons.
Stephen Brown from Capital Economics added that Canada’s weak exchange rate earlier this year may still be pushing up import costs. U.S. vehicle inflation data doesn’t mirror Canada’s, suggesting tariffs aren’t the only culprit.
Bottom Line: Inflation Is Still Sticky
Despite easing in some categories, inflation is far from the Bank of Canada’s comfort zone. Until core pressures decline more clearly, the bank is likely to stay cautious.
Strong employment, stable spending, and stubborn inflation together point to a rate hold in July, with any future moves depending on how the economy evolves through the fall.
Stay tuned to Maple Wire for more insights on inflation trends and rate decisions shaping Canada’s economy.
