Canada Inflation Holds Steady at 2%, Tempering Case for Rate Cut

(Bloomberg) --

Inflation in Canada was firmer than expected last month, keeping underlying price pressure right at the central bank’s target and giving policy makers one less reason to consider immediate interest rate cuts.

Annual consumer price inflation was 2% in July, matching June’s pace, Statistics Canada said Wednesday from Ottawa. Economists had expected inflation to slow to 1.7%. Core inflation, a better gauge of underlying pressure, unexpectedly ticked up slightly to 2.03%.

Stronger inflation dynamics in Canada are one reason why economists and markets are anticipating fewer cuts, and a slower pace of reductions, by the Bank of Canada than the Federal Reserve. Markets are pricing in just one rate cut in Canada over the next six months, versus three for the Fed, even though some analysts have begun to speculate a cut could take place as early as the next rate decision in September due to growing global trade tensions.

“It’s an argument against a September rate cut, but they’ll still have to respond with stimulus if the global economy slows significantly,” Andrew Kelvin, senior Canada rates strategist at Toronto Dominion Bank.

Canada’s currency rose after the release, climbing 0.3% to C$1.3278 against its U.S. counterpart at 8:41 a.m. in Toronto. Two-year bond yields jumped 4 basis points to 1.39%.

Underlying price pressure has been remarkably stable near the Bank of Canada’s 2% target for well over a year. Helping the inflation outlook has been a strong rebound in growth in the second quarter, with the nation’s expansion seen accelerating to almost 3% annualized over that three month period. GDP data is due out next week.

“The economy still looks to be humming along,” said Shaun Osborne, chief foreign exchange strategist at Scotiabank. It “makes the September rate cut call from the Bank of Canada very marginal at best, outside of some significant external event.”

Temporary Strength

Price gains had been expected to ease over the summer months, with the Bank of Canada projecting annual inflation to temporarily fall to 1.6% in the third quarter before returning to 2%. That may still happen, given the strength in July could be due to temporary factors and methodological quirks that could be reversed.

Air transportation and travel tours were the biggest upward contributors to monthly CPI, along with gasoline and digital computing equipment and devices.

“Overall the report shouldn’t do much to alter thinking at the Bank of Canada as many of the moves seem likely to reverse,” Royce Mendes, an economist at Canadian Imperial Bank of Commerce, said in a note to investors.

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• On a monthly basis, consumer prices rose 0.5%, well above analyst projections for a 0.2% gain.
• On a seasonally adjusted basis, prices rose 0.4%, after a 0.1% drop in June. Since February, monthly seasonally adjusted price inflation has averaged almost 0.3%, double the monthly averages recorded in recent years.
• The average of three measures of core inflation tracked by the Bank of Canada rose slightly to 2.03% in July, from a downwardly revised 2.0% in June. The common rate was at 1.9%, the median rate was 2.1% and the trim rate was 2.1%.

--With assistance from Erik Hertzberg.

To contact the reporter on this story: Theophilos Argitis in Ottawa at targitis@bloomberg.net

To contact the editors responsible for this story: Theophilos Argitis at targitis@bloomberg.net, Chris Fournier

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