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With Tuesday’s Consumer Price Index (CPI) release likely to show that inflation slowed in July, economists say the data should be enough to support a third consecutive Bank of Canada rate cut in September.
Economists anticipate that Canada’s annual inflation rate in July likely eased to 2.5 per cent, according to consensus estimates. That would be down from June’s inflation rate of 2.7 per cent.
BMO Capital Markets expects Canada’s annual inflation rate last month to be 2.6 per cent. It also expects the Bank of Canada’s closely watched measures of core inflation – CPI-trim and CPI-median – to hold steady in July, at 2.9 per cent and 2.6 per cent, respectively.
“While the BoC would prefer to see a further deceleration, especially with somewhat favourable base effects, steady core inflation won’t prevent another cut at the early-September policy announcement,” BMO Capital Markets Canadian rates and macro strategist Benjamin Reitzes wrote in a research note.
“Other core measures (CPIX, CPI excluding food and energy) look to see slight deceleration in the yearly rates, providing some evidence that the disinflationary trend continues. Given the softening trend in inflation and sizeable output gap, there’s some downside risk to our call for headline and core inflation.”
Desjardins economists expect headline inflation decelerated to 2.5 per cent, with inflation excluding food and energy – two of the more volatile price components – expected to moderate to 2.6 per cent, the slowest pace since mid-2021.
“With the share of CPI components growing faster than 3 per cent normalizing, Canadian central bankers are feeling more comfortable that inflation is stabilizing within their target range,” Desjardins economists wrote in a report.
“That said, central bankers will want more signs that their preferred core inflation measures are moving lower.”
While RBC Economics economists Nathan Janzen and Claire Fan expect inflation held steady at 2.7 per cent in July, they also note that it “shouldn’t prevent another BoC rate cut.”
“The Bank of Canada is focused on where inflation is going, rather than where it has just been,” Janzen and Fan wrote in a report last week, pointing to a weakening economic and labour market.
“BoC Governor Tiff Macklem reiterated that confidence has increased that inflation will continue to drift lower even if ‘there could be setbacks along the way’ after cutting rates in July. That means a low hurdle against the BoC cutting rates from levels that are still sharply above what it views as normal in the long run,” they said.
“We think the BoC will cut rates by 25 (basis points) in each of the upcoming meetings in September and October.”
The Bank of Canada cut its benchmark interest rate by 25 basis points to 4.5 per cent last month and signalled that more cuts could be ahead if inflation continues to ease. Governor Tiff Macklem said at the time that the Bank was “increasingly confident that the ingredients to bring inflation back to target are in place.” But he also struck a more hawkish tone, economists noted, flagging that downside risks to the economy are taking more weight in the Bank’s future rate decisions.
“One gets the sense that further rate cuts will now only be dissuaded by the data, cuts no longer need to be persuaded by them,” BMO Capital Markets deputy chief economist Michael Gregory wrote in a research note.
Statistics Canada will release July’s CPI data at 8:30 a.m. ET on Tuesday.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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