Canada’s inflation rate slows to 1.7% in July, raising odds of BoC rate cut

Canada’s headline inflation rate cooled to 1.7% in July, down from 1.9% in June, surprising markets and igniting renewed speculation of an interest-rate cut by the Bank of Canada (BoC) 

What’s Behind the Drop?

• Gas prices took the lead, plunging 16.1% year-over-year, thanks to eased geopolitical tensions, increased crude output, and notably, the removal of a federal carbon levy on petrol 

• Month-over-month CPI edged up 0.3%, in line with expectations 

• Stripping out gasoline, inflation still rose 2.5%, underlining continued pressures from other sectors 

• Food prices climbed 3.3%, while the shelter component—dominated by rents and housing—rose 3%, both being substantial drags on CPI even amid broader cooling

Core Inflation: A Gradual Soften

The BoC’s watchful eye is particularly focused on core inflation measures. Encouragingly, the three-month annualized average of core CPI slipped to 2.4%—a notable deceleration from 3.4%—mostly driven by easing core momentum 

However, not all core gauges are below comfort:

• CPI-median held firm at 3.1%, and CPI-trim remained at 3%, both teetering at the upper edge of the BoC’s 1–3% target range

• Meanwhile, over 37% of CPI basket items still exceed 3% inflation, signaling structural pockets of elevated pressure 

Financial Markets React—Rate-Cut Expectations Rise

The inflation report triggered a shift in financial sentiment:

• Markets now assign about a 40% probability of a 25-basis-point cut at the BoC’s September 17 meeting—up from 32–31% earlier .

• The Canadian dollar weakened, with the USD/CAD climbing to 1.3855, while bond yields retreated—2-year yields near 2.70% and the 10-year around 3.45% .

What’s the BoC Signaling?

The Bank has held its key rate steady at 2.75% for three straight meetings. Recent minutes from the July rate decision reveal internal divisions: some officials favor maintaining the rate, while others argue for further cuts amid mounting economic slack .

Headline inflation close to target and early signs of cooling may nudge the BoC toward easing, especially if growth continues to falter.

What This Means for Canadians

• Borrowers may soon see relief if rate cuts materialize, but core inflation remains somewhat stubborn, which may temper the scale or timing of cuts.

• Savers and bond investors may continue to benefit from elevated yields in the short term.

• Businesses and consumers should stay vigilant—food and shelter inflation aren't going away just yet.

Final Take

July’s inflation reading of 1.7% offers a hopeful snapshot: softer headline inflation supported by lower energy costs and dampened core momentum. Yet, robust readings in median and trim measures—and persistent rises in key cost-of-living categories—suggest the BoC may proceed cautiously. Still, market pricing reflects growing optimism for a September rate cut, making the coming weeks a pivotal period for Canadian monetary policy watchers