Economists expect July inflation data to set the stage for further rate cuts – Ottawa Business Journal

Inflation in Canada likely fell again last month, according to economists who expect the Bank of Canada to continue cutting interest rates throughout the fall.

On Tuesday, Statistics Canada will release its consumer price index for July. Forecasters expect inflation to have slowed to 2.4 percent from 2.7 percent in June.

James Orlando, TD's economics director, says that despite upward pressure from gasoline and food prices, he still expects the annual rate to decline due to base year effects, which is the impact of price movements from the previous year on the calculation of headline inflation.

“This is due to the sharp weakening of base effects (in the year) from last July, when inflation rose quite significantly,” he said.

The significant slowdown in price growth this year has boosted confidence among economists and the Bank of Canada that inflation will continue to decline in the coming months and given the central bank the green light to further cut its key interest rate.

“We would have to see something very different from what we have seen with this inflation rate to rule out any kind of rate cut in September,” said Tiago Figueiredo, a macro strategist at Desjardins.

He says Desjardins expects annual inflation to fall to 2.5 percent in July.

The Bank of Canada, which cut its key interest rate at its last two meetings, signaled that it would continue cutting rates as long as price growth slows.

The central bank's move to cut interest rates comes against the backdrop of a weakening economy in which companies and consumers are cutting back on spending.

Meanwhile, the labor market has slowed and the unemployment rate rose to 6.4 percent in July.

Announcing the Bank of Canada's latest interest rate decision, Governor Tiff Macklem said that as inflation approaches the two percent target, the central bank is increasingly taking into account the risks associated with maintaining high interest rates for too long.

“The need to accelerate growth was part of our decision to cut the key interest rate today,” Macklem said at the press conference after the July 24 meeting.

Forecasters now generally expect the central bank to cut its benchmark interest rate at each interest rate meeting this year. Assuming the bank cuts by a quarter of a percentage point at each meeting, it would cut its benchmark interest rate to 3.75 percent.

“There really isn't much in the economy that makes us believe that inflation is going to pick up right now. So I think this just reinforces the expectation that rate cuts will continue at this pace of 25 basis points from meeting to meeting,” Orlando said.

The annual inflation rate has been within the Bank of Canada's target of one to three percent since January, a welcome development after a historic increase in price growth.

The bank predicts that inflation will return to the two percent target next year.

Easing inflation in Canada is part of a larger global trend that is allowing central banks to cut or consider cutting interest rates.

In the US, year-on-year inflation hit its lowest level in more than three years in July, another sign that the worst price increase in four decades is easing and the US Federal Reserve is eyeing a rate cut in September.

The annual inflation rate in the United States is currently 2.9 percent.

The European Central Bank began cutting its key interest rate in June and the Bank of England made its first rate cut earlier this month.