Economists split on BoC’s next rate move after July inflation data

Senior Economist David Macdonald says the Bank of Canada may not adjust the interest rate after inflation eases to 1.7 per cent in July.

Economists say they found some encouraging signs in the latest inflation numbers but some warn the Bank of Canada might need a bit more convincing to cut its key interest rate next month.

The annual rate of inflation fell to 1.7 per cent in July, Statistics Canada said Tuesday, down from 1.9 per cent in June. The reading was a tenth of a percentage point below most economists’ expectations.

A 16.1 per cent decline year-over-year in gas prices tied mainly to the removal of the consumer carbon price earlier this year fuelled the drop.

BMO chief economist Doug Porter said in an interview that the July consumer price index was a “relatively favourable report” despite some stubbornness at the grocery store and in housing.

July’s consumer price index marks the first of two looks at inflation that the Bank of Canada will get before its next interest rate decision on Sept. 17. The central bank held its policy rate steady at 2.75 per cent in July.

The Bank of Canada has been looking for signs of how Canada’s tariff dispute is affecting inflation, and is particularly concerned with trends in core inflation that strip out influences from tax changes and other volatile inputs.

Statistics Canada said the Bank of Canada’s preferred measures of core inflation held around three per cent in July.

Porter pointed out that another measure of core inflation that strips out influences from food and energy was lower in July, around 2.6 per cent.

Looking at those readings, he said the July CPI report “slightly turned the dial” toward a rate cut in September, aligning with BMO’s expectations.

Financial market odds for a quarter-point rate cut in September increased modestly to around 40 per cent as of Tuesday afternoon, according to LSEG Data & Analytics.

But with core inflation still elevated compared with the headline figure, Porter acknowledged BMO’s call for a cut next month was “a long shot” at this point.

“We need some help in the inflation numbers. We probably need a relatively sluggish jobs number as well,” he said.

CIBC senior economist Andrew Grantham said in a note that the lack of easing in core inflation can mostly be attributed to the base-year effect -- the distortion from price movements last year on a particular month’s annual inflation comparisons.

He said the shorter-term, three-month core inflation readings now show an annualized rate of 2.4 per cent for July.

Grantham said there’s still more data to come before the Bank of Canada’s next rate decision, but the July inflation figures support his call for a quarter-point cut in September.

RBC, meanwhile, is maintaining its call for no more interest rate cuts from the Bank of Canada this year.

Claire Fan, senior economist with RBC, said in a note that the monthly advance in core inflation was less than she was expecting. But she said pressure is still spread broadly through the consumer price index.

Inflation on food from the grocery store accelerated to 3.4 per cent annually in July, up from 2.8 per cent in June.

Confectionary prices rose 11.8 per cent and coffee gained 28.6 per cent to be among the biggest contributors to food inflation last month.

Statistics Canada said poor growing conditions in countries that produce cocoa and coffee beans were to blame for higher costs.

Prices for fresh grapes were up nearly 30 per cent, driving the overall cost for fresh fruit up 3.9 per cent in July compared with 2.1 per cent in June.

Porter said there are some hints that Canada’s tariff dispute with the United States is a factor keeping food inflation elevated, but he stopped short of blaming it for pain at the grocery store.

“I think the bigger story is coffee prices ... chocolate prices and beef prices, and those aren’t really a tariff story. Those are more climate issues,” he said.

Tariffs from the U.S. are driving a bit of “stickiness” in durable goods inflation, Porter noted, particularly in motor vehicles.

In addition to duties placed on some Canadian inputs, U.S. tariffs on vehicles from around the world are driving some “spillover” effects on inflation in Canada, he said.

“The trade war has had an effect on auto prices and autos are a big share of the CPI,” he said.

“So yes, unfortunately we have not totally escaped the trade war in our inflation data.”

Shelter inflation also saw a modest acceleration to three per cent last month from 2.9 per cent in June, marking the first increase in the category since February 2024.

Rent price growth picked up in July, particularly in Prince Edward Island, Newfoundland and Labrador and British Columbia. Lower mortgage costs are still moderating the overall increase in shelter inflation.

Prices for natural gas fell to a lesser degree than in June, thanks mostly to higher costs in Ontario.

Porter said the stubbornness in shelter inflation has been “frustrating,” but market data continues to show rent dropping in major cities across Canada, so he expects further easing in this CPI component through the rest of the year.

This report by The Canadian Press was first published Aug. 19, 2025.

By Craig Lord