Hot Core Inflation Likely Keeps Bank of Canada on Sidelines Ahead of July Decision

Core Inflation Remains ‘Too Warm’

Canada’s headline inflation has cooled to a stable 1.7%, but the core inflation measures—CPI-trim and CPI-median—remain firmly at 3.0%, the upper boundary of the Bank of Canada’s target range . That persistence of underlying inflation means inflation is staying hotter than policymakers want, complicating efforts to justify any aggressive rate cuts.

Tariffs Fuel Price Pressures

U.S. tariffs on Canadian exports, especially steel and aluminum, continue to add upward pressure on prices. BoC minutes from the June 4 meeting noted that businesses are passing these costs to consumers, and core inflation might stay elevated if trade frictions persist . Governor Tiff Macklem has called tariffs the “biggest headwind facing the Canadian economy.”

Why the BoC Is Pressing ‘Pause’

Despite a slowdown in headline inflation, core measures remain troublingly sticky. Analysts in June expected a pause from policymakers, estimating a 78% chance the BoC would hold rates steady due to persistent core inflation and mixed economic signals The central bank has already cut rates by 225 basis points since mid-2024, but now prefers a wait-and-see approach.

Market & Loonie Reactions

Following the May CPI release and BoC minutes, the Canadian dollar strengthened slightly as market expectations for an immediate rate cut diminished Swap markets now price in only a ~34% chance of a July rate cut, down from earlier forecasts.

External Pressures Linger

While Q1 GDP came in strong at +2.2%, economic momentum has since faded—household spending and hiring growth have shown signs of weakeningGiven this backdrop, officials are cautious, ensuring inflation shows definitive cooling before reducing rates further.

What to Expect Ahead

Two crucial data points will shape September’s decision: June CPI and Q2 GDP. With core inflation still firm, BoC is unlikely to act in July but may lean toward cuts by September if underlying price pressures ease and growth stays subdued.

Bottom Line

Though headline inflation has cooled, stubbornly high core inflation and trade-driven price pressures suggest the Bank of Canada is likely to hold its key rate at 2.75% in July. The priority remains confirming sustained disinflation before policymakers commit to further easing.