The Bank of Canada held its policy rate steady at 2.75% earlier this month for the second decision in a row as it waits for more clarity on the shifting trade policy and its impact.
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Core inflation is on the right path
BMO chief economist Doug Porter said in a note to clients Tuesday that core inflation was moving in the right direction, but likely not enough on its own to convince the Bank of Canada to cut again.
The central bank will get a look at June inflation figures before its next rate announcement on July 30, and Porter said monetary policymakers will likely need to see underlying inflation drop below 3% to warrant a return to cuts. “The data over the next five weeks will ultimately drive the decision, but the odds of a July cut are lower now on the so-so CPI,” he said.
As of Tuesday afternoon, financial markets were pricing in odds of a quarter-point cut on July 30 at 34%, according to LSEG Data & Analytics.
A separate release from StatCan on Tuesday gave a flash estimate for manufacturing sales in May. Early signs suggest a 1.3% monthly drop, coming off a 2.8% decline in April as Canada’s tariff dispute with the U.S. weighed on activity.
TD Bank senior economist Andrew Hencic said in a note Tuesday that the trade war is likely to keep the economy soft in the months ahead, dampening inflation pressures going forward. “As has been the case this year, the outlook is heavily dependent on how trade negotiations evolve, but we believe that the soft economic backdrop should give the BoC space to deliver two more cuts this year,” he said.
Janzen is less sure additional interest rate cuts are warranted. While there are signs of economic weakness in trade-sensitive manufacturing data, he noted that consumer spending has held firm so far in the trade dispute. Government spending is also expected to ramp up in the coming months, he said, helping to support growth in the face of tariffs. “Against that backdrop, our own base-case assumption is no additional interest rate cuts needed from the Bank of Canada,” Janzen said. “But if the economy were to soften more than we expect, there is room for the central bank to step in with more support.”
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