Canada’s Inflation Slows in July, Paving Way for More Rate Cuts
The CPI report from Statistics Canada showed a broad-based deceleration in inflationary pressures, driven by falling prices for travel tours, passenger vehicles, and electricity.
Canada’s inflation rate eased to 2.5% in July, marking the slowest increase in over three years and solidifying expectations for a third consecutive interest rate cut from the Bank of Canada (BoC). With inflation continuing to moderate, analysts anticipate that the central bank will lower rates by 25 basis points during its upcoming meeting in September, part of a broader effort to support economic growth amid fading inflation risks.
The Consumer Price Index (CPI) report from Statistics Canada showed a broad-based deceleration in inflationary pressures, driven by falling prices for travel tours, passenger vehicles, and electricity. The July figure represents the seventh straight month in which inflation has stayed within the central bank’s target range, further justifying the BoC’s anticipated rate cuts.
Benjamin Reitzes, managing director of BMO Capital Markets commented on the July numbers, stating:
“The July CPI report should further cement a 25 bp rate cut from the Bank of Canada in September. There’s no urgency for policymakers to act more aggressively at this point, but rate cuts will keep coming as inflation continues to move toward 2%.”
Key Factors Behind the Inflation Drop
July’s inflation was influenced by several key factors. Shelter costs, a major component of the CPI, slowed to a 5.7% annual increase, down from 6.2% in June. Rent inflation, which had been a significant driver of higher costs, also eased slightly to 8.5%. Mortgage interest costs, while still high, saw a modest decrease in their rate of increase, dropping from 22.3% in June to 21% in July.
Additionally, the prices for many goods, such as clothing and footwear, have outright fallen compared with last year. Grocery prices, which at one point were rising at double-digit rates, grew at a much more modest 2.1% in July.
Economists also pointed to the ongoing effects of high interest rates, which have helped dampen consumer demand and slow price increases. Global supply chain improvements, particularly in sectors like food and energy, have also contributed to easing inflation.
Outlook for Further Cuts
The Bank of Canada has already cut interest rates twice this year, and markets are now pricing in two more rate cuts after the expected September adjustment. The central bank’s current policy rate stands at 4.5%, but economists believe it could fall further before the year’s end.
Commenting on potential BoC rate cuts, Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, said:
“There’s more to go in terms of reaching price stability as Canadians feel the pinch and pull back on spending. But we think the Bank of Canada will continue their path of interest rate cuts and move again in September, prioritizing economic growth as inflation moderates.”
The BoC’s policy decisions are being made against a backdrop of weakening labor market conditions. July saw the country lose 2,800 jobs, and unemployment held steady at 6.4%, the highest level in over two years. This has raised concerns that keeping interest rates too high for too long could further slow consumer spending and economic growth.
As Canada’s inflation continues to cool and the BoC remains focused on supporting the economy, the country is likely to see additional monetary easing in the coming months, with markets anticipating more cuts through October and December.
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