‘Sounds like they’re still going to be cautious’

Continued from FP1

However, the bank raised its trendsetting rate July 12 for the first time in nearly seven years. In doing so, the bank’s governing council said the inflation softness was mostly temporary and predicted the rate will be close to two per cent by mid-2018.

Several economists noted that Friday’s inflation numbers were unlikely to change the bank’s view, but served as a reminder that governor Stephen Poloz will continue tightening monetary policy — or raising rates — at a measured pace.

“It sounds like they’re still going to be pretty cautious in terms of hiking interest rates and this data is a reason that you don’t have to rush to hike,” said Nathan Janzen, a senior economist for RBC.

Poloz’s rate hike — to 0.75 per cent from 0.5 per cent — undid one of the two 25-basis-point cuts he introduced in 2015 as insurance following the collapse in oil prices. There are widespread expectations the bank will increase the rate by 25 basis points again in October, which would essentially reverse the bank’s other 2015 reduction.

“That’s still very low by historical standards,” Janzen said.

The June inflation figure matched expectations from a consensus of economists that had predicted a reading of one per cent, according to Thomson Reuters.

Statistics Canada said lower gasoline prices last month were a primary contributor behind the slowdown, as pump prices contracted 1.4 per cent compared to a year earlier.

The data also showed that two of the Bank of Canada’s three measures for core inflation, which omit volatile consumer items like gas, accelerated slightly last month to 1.6 and 1.4 per cent. The other one was unchanged at 1.2 per cent.

The inflation-targeting bank also scrutinizes those core readings ahead of its rate decisions.

“Turning to the measures used by the Bank of Canada to gauge underlying inflation, they were also stronger compared to prior months,” National Bank senior economist Matthieu Arseneau wrote Friday in a research note.

“This report supports our view that the central bank will raise the overnight rate one more time by year-end, especially since the Bank of Canada blamed temporary factors for the recent weakness in inflation.”

Statistics Canada also released retail trade figures Friday for May that show total sales increased 0.6 per cent, its third straight month of growth. Total retail trade for May rose above $48.9 billion.

The expansion was propelled in part by stronger auto sales as well as grocery and alcohol purchases, the agency said.

Experts said the sturdy, higher-than-expected retail sales numbers were yet another indicator of a strengthening Canadian economy.

“Canadian consumers (are) still very much doing their thing,” BMO chief economist Doug Porter wrote to clients.

“Overall, there’s nothing here to keep the Bank of Canada from staying on its gradual — presumably very gradual — tightening path.”