Brown Brothers Harriman’s (BBH) Elias Haddad anticipates that Canada’s July Consumer Price Index (CPI) will keep core inflation below 2%, reinforcing expectations for an extended pause by the Bank of Canada (BoC) in its monetary policy decisions [1]. The headline CPI is projected at 2.9% year-over-year, up slightly from 2.8% in June, while core CPI (excluding food and energy) is expected to remain steady at 1.8% year-over-year. The average of trim and median core CPI is forecasted at 1.85% for the second consecutive month [1]. For comparison, the BoC projects headline CPI at 2.5% year-over-year and core CPI (average of trim and median) at 2.0% year-over-year for Q3 [1].
A significant market-moving development is the impending imposition of 50% US tariffs on nearly USD 20 billion of Canadian imports, representing 0.85% of Canada’s GDP. These tariffs, set to take effect on Wednesday unless trade negotiations yield a breakthrough, will impact a wide range of products including wine, hockey sticks, and cement. However, energy, potash, products already subject to Section 232 tariffs, fish, and critical minerals will be excluded from the new tariffs [1].
The combination of anchored core inflation below the BoC’s 2% target and escalating US-Canada trade friction is expected to support an extended BoC pause. BBH notes that this environment leaves room for BoC rate-hike expectations—currently priced at 65 basis points over the next twelve months—to be repriced lower, which could weigh on the Canadian Dollar (CAD) [1].
CONCLUSION
Canada’s subdued core inflation and looming US tariffs are expected to reinforce an extended pause by the Bank of Canada, prompting a potential downward adjustment in rate-hike expectations. These developments pose headwinds for the Canadian Dollar, with market sentiment leaning negative as trade friction intensifies.