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Canada’s Consumer Price Index stayed flat from April in May, holding at 1.7%, slightly below FactSet estimates of 1.8%. This takes some pressure off the Bank of Canada to cut interest rates at its next meeting on July 30. The latest Statistics Canada report showed the index rose 0.6% on a monthly basis, due to smaller-than-anticipated declines in gasoline and cellular services. Excluding energy, the index climbed 2.7% in May, a slowdown from a 2.9% increase in April.
Analysts say the slight deceleration in core inflation may not be enough to convince policymakers to cut rates. Unless economic data shows significant weakness in the weeks ahead of the central bank’s next meeting, another hold appears to be the most likely outcome.
Softness in Gasoline and Shelter Prices Kept the Index Stable in May
The May data shows that a smaller price increase for rent and a decline in travel tours dragged the CPI lower, but this was somewhat offset by a smaller-than-expected decline in gas and cellular services. The report also notes that shelter prices grew at a slower pace annually, while prices for travel tours and air transportation softened, reversing April’s trend.
A noteworthy trend was the decline in core inflation, as both median and trim (the Bank of Canada’s preferred measures) edged lower to 3.0% from 3.1% in April. Core inflation excludes more volatile components, offering a clearer view of underlying price trends. While core inflation shows signs of cooling, analysts say policymakers will be closely watching the next GDP data and another inflation report, both due out before the Bank’s July 30 meeting, to make a rate decision. The Bank has delivered two quarter-point cuts this year, but has stood pat at its last two meetings, holding the policy rate steady at its current 2.75% level.
Following the CPI report, the overnight index swaps market cut the odds of a rate reduction from 40% to about 33%. Some economists expect more cuts this year, while others are leaning toward the view that monetary unwinding may be coming to an end.
The following are excerpts from analyst commentary on the May CPI report.
May CPI Data Dims Odds of a Rate Cut
Douglas Porter, chief economist at BMO Economics
“The latest inflation results are broadly similar to April’s outing—a deceptively calm headline number with core hovering too far above the 2% target for comfort. The Bank of Canada will likely need to see much more improvement before it’s convinced that underlying inflation is headed back to 2%. The small counterpoint is that evidence is building that the economy is beginning to more fully feel the weight of US tariffs, as the flash on manufacturing sales for May showed a 1.3% drop. 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.”
A Rate Hold is the Most Likely Scenario
Alexandra Brown, North America economist at Capital Economics
“Despite the 0.3% rise in the CPI excluding food and energy, the smaller 0.2% average gain in CPI-trim and CPI-median should ease concerns among the Governing Council, with the average annual rate easing to 3.0%, from 3.1%. Nonetheless, given the evidence of tariffs putting upward pressure on goods prices, our base case now is that the Bank will remain on hold again in July before considering rate cuts again later in the year.”
More Inflation Softening Needed to Justify Another Rate Cut
Katherine Judge, executive director and senior economist at CIBC Capital Markets.
“The Bank of Canada will need to see the moderation in core measures maintained in the next report to deliver the July cut that we expect. Tariff impacts will become more evident in the releases ahead, but we look for waning demand tied to the rise in the unemployment rate to provide an offset, along with the appreciation in the Canadian dollar, and a deceleration in shelter inflation.
“There was little market reaction to the data, as it was largely on consensus and doesn’t lean definitively towards a July cut (but also doesn’t negate one), and there are still several key data releases before the July 30 meeting that will be inputs into the Bank of Canada‘s decision .”
Tame Inflation Report Keeps July Rate Cut in Play
Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets
“We view the details of this inflation report as relatively tame and, as a result, continue to forecast that the Bank of Canada will cut rates in July. As our team had expected, the strength in core measures of inflation seen in April was largely due to one-time factors. While there is still a lot of time, and data to be released, between now and the next Bank of Canada rate announcement, this report should give officials reassurance that isolated price increases due to tariffs aren’t turning into more broad based, sustainable inflation.”
No Pressure on the BoC to Cut Unless Labor Market Deteriorates
Philip Petursson, chief investment strategist, IG Wealth Management
“We would argue inflation is solidly within the Bank of Canada’s target and desired range. Not too hot, not too cold, just right. It is more than fair to say that inflation has settled into its normal range. The CPI print allows Governor Macklem and the Bank to continue to shift their focus away from inflation, having won that battle, and turn their attention to economic growth and the labor market. With the remaining uncertainty with respect to the tariffs, there is no pressure for the Bank to cut in July unless the labor market continues to soften and in a more meaningful way. This is the immediate risk.
“Canadians no longer need to worry about runaway inflation, but are starting to worry about their employment situation. The Bank of Canada may allow some time to see if the labor market weakness is a temporary result of tariffs or something more endemic in the Canadian economy. If the labor data continues this trend, we expect the Bank of Canada will follow-through with one more cut before the end of the year.”
Dismissing a Rate Cut Outright Would be Hasty
Dustin Reid, Chief Strategist, Fixed Income at Mackenzie Investments
“Base effects next month on core inflation for the June data will be less friendly, and so core inflation will need to temper even more on a monthly basis for the annual rate to continue to slow. While there are pockets of strength and weakness throughout the report, there is not enough weakness for the Bank of Canada to begin considering easing at its July meeting. That said, with another CPI print looming before the Bank’s next meeting, completely ruling out a July cut at this point would be slightly premature.
“Similar to the [US] Fed, the Bank of Canada is having to work through the complexities of tariff-related inflation pass-through, and the impact on inflation, consumers and the economy when it comes to calibrating the right level of monetary policy.”
Elevated Core Inflation Offer Little Clarity on the Policy Path
Nick Rees, head of macro research at Monex Canada
“Stabilization across the May inflation data should keep the Bank of Canada non-committal. Clear evidence of tariff passthrough continues to prove elusive, yet core price growth remains elevated, an outcome that does little to decide the issue of a July rate cut for policymakers. Indeed, we suspect the Governing Council will be glad that another inflation print, and the possibility of more clarity, is due before the Bank of Canada ’s July rate decision. This is being reflected by markets post-release, with both July rate cut odds, and the loonie, little moved by this latest data.”
There is Still a Hint of Stubbornness in Core Inflation
Taylor Schleich, director, economics and strategy at the National Bank of Canada
“When it comes to the Bank of Canada, we wouldn’t say this report significantly leans towards a cut or a hold when looking to next month’s decision (although the market interpreted it slightly hawkishly). While overall inflation remains reasonably well contained (headline or excluding taxes), there’s still a bit of uncomfortable pressure in the core segment. Tariff-driven inflation risks are also weighing on the central bank.
“It means that, when pricing the July 30 decision, markets will continue to hover in ‘uncertainty territory’ until additional important data is released. To be sure, there’s still a lot to go before the next meeting, including another CPI report next month, GDP (on Friday), jobs data and a Business Outlook Survey. Our baseline forecast involves a July cut but that’s very much a data dependent call. We’ll need to see more co-operation in the next month, via a softer June inflation report and/or continued weakness in the labor market.”
The Bank Will Keep Rates in Neutral Territory
Michael Davenport, senior Canada economist at Oxford Economics
“While higher auto prices in May could in part reflect initial tariff pass-through, there were few signs of upward pressure on overall inflation from tariffs last month. We expect temporary Canadian counter-tariff remissions to limit the upward pressure on prices from the trade war until the relief for non-auto imports ends in mid-October. The removal of the consumer carbon tax will also continue to hold down y/y headline inflation for the next year.
“US-Canada trade negotiations are underway, but uncertainty remains elevated, and higher Canadian counter-tariffs are likely if a deal is not reached by July 21. Ongoing geopolitical uncertainty also presents upside risks to inflation. There’s still over a month before the next Bank of Canada decision, but we expect it will continue to hold rates in neutral territory as it tries to manage pervasive uncertainty and balance the opposing forces on inflation from the trade war.”
The Rate-Cutting Cycle Has Run Its Course
Abbey Xu, economist at Royal Bank of Canada
“The Bank of Canada appears to have reached the end of its cutting cycle, with the policy rate now in the middle of the neutral range. While it has left the door open to further easing, that would likely depend on clearer signs of economic weakness alongside contained inflation. In the near term, tariff-related uncertainty could keep (after-tax) inflation slightly elevated, but we continue to expect it to trend close to target further out.
“At the same time, geopolitical instability in the Middle East has been fueling volatility in oil markets. However, the elimination of the carbon tax will continue to keep energy prices subdued compared to levels from a year ago.”
Next CPI Report Key to Bank’s Rate Decision
Tu Nguyen, economist at RSM Canada
“Rising unemployment and a relatively low effective tariff rate means more downward pressure on inflation in the months ahead. Core inflation measures stayed steady at 3% and can increase the odds of the Bank of Canada holding their interest rate at 2.75%.
“The Bank of Canada will have one more month of CPI data before their next rate decision. If core inflation remains elevated, the Bank might hold again in July. In addition, the Bank might decide to cut the rate once instead of twice this year if stronger than expected business and consumer spending keeps up. This will bring the policy rate down to 2.5% by the year’s end.”
A Rate Cut Shouldn’t Even be on the Table Right Now
Derek Holt, vice president and head of capital markets economics at Scotiabank
“Core inflation remains too warm to be contemplating rate cuts. Ignore the headline CPI reading that continues to be weighed down by the elimination of the consumer portion of the carbon tax; it’s below the 2% target, but the tax distortion makes that meaningless. The bigger issue here is that underlying price pressures remain too high and rising breadth combines to signal that inflation has yet to be licked. To twist a phrase, the Bank of Canada shouldn’t even be thinking about when to cut rates. Let’s see prospects for a trade and security deal, a Fall budget, and further data first.”
Soft Economic Backdrop Justifies Two More Cuts by Year-End
Andrew Hencic, director and senior economist at TD Bank
“After last month’s unpleasant inflation surprise, May’s data came in largely as expected. Top line inflation continues to be restrained as the impact of the end to the consumer carbon tax offset changes in energy prices. For core inflation there was good news too, as all four measures cooled amid falling travel tour and rent prices. The ongoing challenges in the housing market (particularly in Ontario) should help to temper further gains in rents in the coming months. “After last month’s uptick in core inflation some giveback was expected. The labor market remains soft and tepid domestic demand growth should keep a lid on inflationary pressures. 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 Bank of Canada space to deliver two more cuts this year.”
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
