The Bank of Canada left its policy interest rate unchanged at 2.75% at its July meeting and delivered a notably hawkish accompanying statement that markets interpreted as a signal that no further rate reductions are likely before the end of 2026. The decision was unanimous among Governing Council members.
The June Consumer Price Index, released one day before the rate decision, showed headline inflation at 2.3% year-over-year — unchanged from May and above the Bank's 2% target for the fourth consecutive month. More significantly, the Bank's two preferred core inflation measures — CPI-median and CPI-trim — averaged 2.6%, suggesting that underlying price pressures remain more persistent than the headline number implies.
Services Inflation the Key Problem
The breakdown of the June CPI data reveals the structural challenge facing the Bank of Canada. Goods inflation has fallen sharply to just 0.8% year-over-year, reflecting lower energy prices and easing supply chain costs. Services inflation, however, remains elevated at 3.9% — driven primarily by shelter costs, wages in labour-intensive industries, and insurance premiums.
"Services inflation is wage-driven in large part, and wages are still growing at 4-4.5% nationally," noted Rishi Mehta, senior economist at Scotiabank. "Until you see that moderate, the Bank is going to struggle to get comfortable moving rates lower. They're essentially caught between a goods sector that has normalised and a services sector that hasn't."
"Until you see wage growth moderate, the Bank is going to struggle to get comfortable moving rates lower."
— Rishi Mehta, Scotiabank
Market Reaction and What Comes Next
Bond markets reacted with modest selling, pushing the 2-year Government of Canada yield up 8 basis points to 3.48% on the day of the decision. The loonie gained 0.3% against the US dollar as higher-for-longer rates supported the currency. Bay Street now prices in zero rate cuts before December 2026, with the first full cut priced for Q1 2027.