Will he or won't he?

Bank of Canada Governor Stephen Poloz, that is.  Despite the Bank's generally upbeat view of the economic outlook,  in recent weeks markets have begun to price in a greater probability of a rate cut, possibly as soon as next month.  The logic is that if the Federal Reserve is cutting, the Bank will need to match or risk seeing the exchange rate move to an uncompetitive level.

This morning Statistics Canada released its report on consumer prices for July.  Headline CPI rose 2 percent year-on-year, the same as in June and exactly in line with the Bank's target.  Despite this, rate cut expectations have been tempered somewhat, on the basis that markets had been expecting a slightly lower number.  Inasmuch as expectations for a rate cut were largely unrelated to the inflation outlook, this is slightly perverse.

All eight of the sub-indices calculated by StatsCan were higher year-on-year in July but, as has been the case for the past year and more, the key driver of the headline number was the price of gasoline.  This rose month-on-month, but remained lower (by almost 7 percent) on an annual basis. This helped offset increases in prices for durable goods and food, as well as a sharp rise in air transportation costs.  Anecdotally it appears that gasoline prices have retreated this month, so when StatsCan publishes its August data, it may well be that CPI moves just below the target range.

The bank's three preferred core measure of inflation showed virtually the same annual increases in July as in June. The mean of the three measures remains fractionally above the 2 percent target.

The Bank's next interest rate announcement is scheduled for two weeks from now, on September 4. With Labour Day out of the way, campaigning for the October Federal election will be getting into full swing.  Although the Bank has changed its policy settings ahead of elections in the past, it would likely prefer not to do so. An external shock, such as another Fed rate cut, could force the Bank's hand, but in the absence of a sudden shift in Gov. Poloz's rhetoric, no rate cut is likely until the end of October, when the election will be safely out of the way.