No rush for Bank of Canada to raise interest rate even as inflation rate hits 3%, say economists

Canada’s inflation rate in July rose to three per cent from 2.8 per cent the month before as gasoline prices spiked, but economists say the Bank of Canada is likely to look past this latest reading.

Here’s what they say the data might mean for the economy and interest rates.

The generally subdued readings for core inflation mean there’s no rush for the Bank of Canada to raise interest rates, said CIBC senior economist Andrew Grantham. He said policymakers have plenty of time to assess oil price fluctuations, how the tariff situation plays out and whether the rebound in economic activity we are currently witnessing can be sustained.

The rate, driven by higher gasoline prices and airfares, shouldn’t be a concern to policymakers at the Bank of Canada, Grantham said.

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He noted that the acceleration in July could be partly unwound next month, with Statistics Canada suggesting that there was still an impact from the World Cup on fares to the U.S. in July.

The headline reading was a tick higher than consensus expectations, Grantham said, and while there’s still plenty of uncertainty regarding future oil and gasoline price moves, so far average prices in August are tracking close to July’s level, which should see headline inflation hold at or close to July’s print.

“Nothing to worry about,” he wrote on a note on Monday. Grantham said continues to forecast no change in the overnight rate until around mid-2027.

While core prices rose at their strongest pace in almost a year in July, the key drivers were temporary factors and the annual rate remained at the Bank of Canada’s two per cent target, said Bradley Saunders, North America economist at Capital Economics.

“The key message therefore remains that a soft inflation backdrop is providing an effective counterbalance to stronger activity and labour market data with regards to the path for interest rates,” said Saunders.