June Inflation Rise All but Shuts Door on Bank of Canada Rate Cut

Canada’s Consumer Price Index rose in June after staying flat the month before, further dampening the odds of an interest rate cut by the Bank of Canada at its upcoming meeting.

June inflation accelerated to 1.9% from 1.7% in May, though it was lower than the FactSet consensus estimate of 2.6%. The upward inflationary pressure will likely provide the central bank with further justification for standing pat on its policy rate at its July 30 meeting.

The latest Statistics Canada report showed the index rose 0.1% on a monthly basis, led by a spurt in prices of durable goods. Excluding energy, the index climbed 2.7% in June on an annual basis, unchanged from May.

The reversal of the inflation trend prompted analysts to further scale back their expectations for policymakers to deliver a rate cut. With no major economic data scheduled for release ahead of the Bank’s next meeting, another rate hold may be the most probable scenario.

Automobiles and Furniture Lifted June Inflation

The June print shows that a slower-than-expected decline in gasoline prices, combined with tariff-driven spikes in vehicle and furniture prices, pushed the CPI index higher.

Core inflation also edged higher, reversing last month’s downward trend. One of the Bank of Canada’s preferred core measures, the CPI-median crept slightly to 3.1% in June from 3.0% in May, while the other measure, CPI-trim, was unchanged at 3.0%.

Core inflation excludes the more volatile components of the CPI basket of goods, offering a clearer view of price trends. Economists note that the inflation data and last week’s strong jobs numbers likely weaken any justification for the central bank to cut interest rates.

The Bank has delivered two 25-basis-point cuts this year, but it has stayed on the sidelines at its last two meetings, maintaining its policy rate at 2.75%.

Following the CPI report, the overnight index swaps market cut the odds of a rate cut from 20% to about 10%. While some economists still expect rate cuts later this year, others are beginning to see it as the end of the road for easing.

The following are excerpts from analyst commentary on the June CPI report.

June CPI Data Confirm Another Rate Hold

Charles St-Arnaud, chief economist at Alberta Central

“Overall, the report suggests that headline inflation remains low, but that underlying inflationary pressures remain elevated. As such, the Bank of Canada is to remain concerned by its preferred measures of inflation remaining above 3%. The Bank of Canada is currently placing more emphasis on current inflation than on the amount of slack in the economy.

“Today’s CPI number confirms that the Bank of Canada will be on hold at the July meeting, as inflation will remain a worry. Moreover, the rebound in the labor market in June, improvements in business and consumer confidence, and the reduction in economic uncertainty suggest the Canadian economy is no longer deteriorating and is likely stabilizing. Hence, the Bank of Canada can afford to be patient and to receive more information before acting.”

No Incentives to Cut Without a Pullback in Core Inflation

Douglas Porter, chief economist at BMO Economics

“Today’s result gives the Bank of Canada almost nothing to justify a rate cut in July. If the solid employment report was the icing on the cake for that decision, this is the cherry on top. Simply put, underlying inflation remains stubbornly strong. We’ll need to see a material deceleration in core for a cut in even the September meeting to be in play, barring a steep deterioration in the economy (which can’t be ruled out with the ongoing tariff uncertainty).”

Underlying Inflation Puts Paid to Any Rate Cut Hopes

Thomas Ryan, North America economist at Capital Economics

“The above-target monthly gains in CPI-trim and CPI-median in June means the door is now firmly slammed shut on a July rate cut from the Bank of Canada, leaving the three-month annualized pace of those averaged measures holding uncomfortably high at 3.5%.

“All in all, elevated core inflation suggests cost pressures persist in the economy, likely driven by the earlier depreciation of the loonie and the impact of retaliatory tariffs. This reinforces the Governing Council’s bias toward keeping policy in the neutral range rather than easing further, posing a risk to our forecast of two additional rate cuts this year –more than markets currently expect.”

The Bank’s Neutral Stance Signals Undue Caution

Ali Jaffery, executive director and senior economist at CIBC Capital Markets

“Overall, the increases in prices seen today don’t really look very durable and look more like idiosyncratic price level adjustments, especially considering the widening slack, high economic uncertainty and slowing income gains.

“The [US] President’s latest tariff threat, even if obviously a negotiating tactic, only makes the downside risk to the economy greater. It also complicates the near-term outlook for inflation if tariffs do end up higher both on Canada and the rest of the world, but is the right response to keep monetary policy neutral to modestly restrictive? That seems like an excessively cautious way to guard against expectations de-anchoring when headline line remains not far from target, with high costs for the economy and creating downside future risks for inflation. “The Bank of Canada will want to see cost pressures contained and measures of underlying inflation cool a bit more before providing relief to the economy. We expect the Bank of remain on pause at its July decision.”

Bank of Canada May Resume Cuts in September

Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets

“There was some evidence of tariffs pushing up consumer prices in June. Overall, price growth was relatively broad based, with the distribution across categories fairly normal.

“In combination with the surprising strength in employment, the June inflation data suggest that the Bank of Canada will likely remain on the sidelines later this month. That said, we still expect slower population growth, mortgage renewals, and weak business investment to lead the central bank to resume its rate cutting cycle in September.”

‘Do Nothing’ is the More Probable Path

Philip Petursson, chief investment strategist, IG Wealth Management

“Canadian CPI came in as expected for June with a headline year-over-year print of 1.9%. But meeting expectations doesn’t make the rate decision easier for the Bank of Canada. [The report] does not give the Bank of Canada the green light to cut its overnight rate in July. In fact, we believe the direction for inflation is higher through the back half of the year – which will keep the Bank on the sidelines.

“Modelling out inflation through the remainder of 2025 shows an upward trend back towards 3%. Further tariff pressure will only compound that number. This is the challenge the Bank of Canada has….should the Bank hold firm on its inflation commitment, the likelihood of an additional rate cut falls further and further away. The Governing Council would have a difficult time justifying an additional rate cut given sticky (and higher) inflation, alongside the better-than-expected June jobs report.

Persistent Inflation Pushes Rate Cuts to Later in the Year

Matthieu Arseneau, economist at the National Bank of Canada

“The latest inflation data aligns broadly with expectations, showing an annual inflation rate of 1.9%. At first glance, this figure is not alarming as it is close to the Bank of Canada’s target of 2.0%. However, when the impact of indirect taxes is removed, which decreased with the abolition of the carbon tax, the consumption basket rose by 2.5%. This rate is comfortably within the higher band of the Bank of Canada’s target range.

“Given this morning’s data, it is even more likely that the Bank of Canada will remain on the sidelines in July, especially since private employment is showing signs of recovery, according to the Labor Force Survey in June. While the Canadian economy was weakened in the first half of the year by tariff uncertainty, as evidenced by the decline in GDP in April and May and the unemployment rate rising by three-tenths of a percentage point from February to June, this has not yet resulted in lower inflationary pressures. We continue to believe that monetary accommodation will be necessary by the end of the year.”

Trade Uncertainty to Keep Consumer Prices Elevated

Michael Davenport, senior Canada economist at Oxford Economics

“Core inflation also ticked up in June, and likely remains too firm for the Bank of Canada. There were signs of upward pressure on consumer prices from tariffs last month, but the impact appears to be marginal so far. StatCan attributed the jump in year-over-year clothing price inflation in June to ‘trade uncertainty’ amid higher costs from tariffs, but upward pressure on durable goods prices likely also reflects tariff-related factors.

“With trade policy uncertainty still near an all-time high and core price pressures likely too firm for the Bank of Canada to be confident that underlying inflationary pressures are contained, we expect the Bank of Canada will continue to hold the overnight rate steady on July 30.”

The Rate-Cutting Cycle Has Run Its Course

Abbey Xu, economist at Royal Bank of Canada

“Year-over-year inflation continues to be skewed by the removal of the federal carbon tax. The Bank of Canada’s preferred core measures exclude the effects of that tax change and both CPI-median and CPI-trim measures have held steady at around 3% year-over-year since April, remaining significantly above the Bank of Canada’s 2% inflation target. “We continue to expect Canada’s restrained approach to retaliation to tariffs from the US administration will limit the impact of the trade war on Canadian consumer prices. But firmer price growth among domestically produced and consumed services comes alongside a June labor market rebound, improved business sentiment, and resilient consumer spending trends. While downside risks to economic growth persist, recent data is consistent with our base-case view that the Bank of Canada will not cut interest rates again this cycle, having opted to skip cuts at its last two meetings.”

The Bank Has Already Cut Too Far and Too Fast

Derek Holt, vice president and head of capital markets economics at Scotiabank

“The Bank of Canada is on an extended policy hold that is reinforced by this morning’s core inflation readings. A hold on July 30 is very likely after 83k jobs were created in June, with core CPI remaining too warm amid light evidence that tariffs might be working their way through, and given no clarity on trade and fiscal policy. I wouldn’t be the least bit surprised to see the Bank of Canada boycott a baseline forecast again in favor of uncertain scenarios in the July 30 MPR.

“Such inflation readings continue the trend of far too warm underlying pressures on inflation. The Bank of Canada has not yet won the fight against past drivers of inflation, let alone forward-looking uncertainties that could keep it sticky. The Bank of Canada prided itself for having been earlier to ease than most other central banks, but arguably cut too far and too fast without concrete evidence that core inflation was waning and policy is now arguably too loose going into major uncertainties surrounding inflation risk.”

Trade Threat and Economic Uncertainty Still Justify Rate Cuts

Andrew Hencic, director and senior economist at TD Bank

“Another month of the inflation data coming in as expected. Top line price growth continues to be restrained by weak readings for gasoline. The groundwork for July to continue June’s story (weak top-line price growth and more core strength) looks to be set.

“Healthy core price growth, coupled with last week’s surprisingly robust employment gains now make a July cut from the Bank of Canada unlikely. However, renewed trade threats add to the uncertainty that has lingered over the economy since the start of the year. Looking forward, the course of trade negotiations and evidence of whether June’s healthy labor market report was a one-off, or the start of a new trend, will be crucial. Ultimately, we believe that absent a quick resolution on trade, the economic backdrop should give the Bank of Canada space to deliver more easing this year.”