Inflation data coming amid rate cut bets. Here’s what to know – National
Many economists are expecting that July inflation data coming this week won’t dissuade the Bank of Canada from another interest rate cut at its next decision in September.
Tuesday’s release of July consumer price index figures from Statistics Canada will be the central bank’s last look at the latest inflation trends before its upcoming rate decision slated for Sept. 4.
Royal Bank of Canada economists Nathan Janzen and Claire Fan said in a note Friday that “the easing of Canadian inflation pressures has slowed in recent months.” June data showed the annual rate of inflation cooled to 2.7 per cent.
RBC is expecting that inflation held steady at those levels for July.
Bank of Montreal, on the other hand, is calling for the annual rate to drop to 2.6 per cent month, despite expectations that rising gas and travel costs added to inflationary pressures in July.
Benjamin Reitzes, director of Canadian rates and macro strategist at BMO, said in a note Monday that headline inflation should continue to ease largely because of base-year effects, which refer to the impact on inflation from movements this time last year in the CPI basket.
Travel has proven to be thorny in inflation calculations during the summer, says Stephen Brown, Capital Economics’ deputy chief North America economist.
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He told Global News earlier this month that while seasonal adjustments usually account for an uptick in travel prices in the summer months, the flood of demand for vacations and air travel since the pandemic has led to an outsized impact on inflation.
“We’ve had more of a seasonal spike than normal and that’s not being corrected for. So there is a bit of an upside risk to inflation compared to the Bank’s expectations in July specifically,” he said.
But whether headline inflation cools, holds steady or sees a slight bump in July, most economists are expecting another rate cut from the Bank of Canada is in the cards for September.
Brown notes that if price pressures accelerate in July because of travel costs, that’s likely to be a temporary phenomenon that the central bank policymakers could look past.
Reitzes agreed that an uptick in inflation “isn’t likely to change much for the Bank of Canada,” as the economy remains in a “difficult spot” with plenty of “disinflationary pressure.”
Canada’s unemployment rate has been on the rise this year, holding at 6.4 per cent in July amid a loss of 2,800 jobs.
In discussing its decision to reduce its benchmark interest rate for a second consecutive time in July, market watchers noted a tone shift from the Bank of Canada, more concerned with cracks in the labour market and fears that inflation could drop too low rather than getting stuck above the two per cent target.
Janzen and Fan noted Bank of Canada governor Tiff Macklem’s recent assurances that the central bank is growing confident that inflation will continue to decline even if there could be “setbacks along the way.”
“The Bank of Canada is focused on where inflation is going rather than where it has just been,” they wrote.
“A still weakening economic and labour market backdrop should suggest inflation pressures in Canada will further unwind.”
RBC is expecting interest rate cuts of 25 basis points at each of the next two meetings in September as well as October.
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