On Friday, figures out of Canada showed that inflation in July strengthened year-on-year in line with expectations, increasing the odds for another rate hike this year. As a result, the loonie extended its uptrend against its US counterpart.
Based on Statistics Canada, consumer prices in the last twelve months grew as expected by 1.2% as six out of the eight major CPI components showed improvement during the month – this followed a rise by 1.0% in June. Particularly, increases in transportation and shelter costs contributed the most to the rise. Gasoline prices also jumped substantially by 4.6% y/y after decreasing by 1.4% in June.
On a monthly basis, consumer prices remained unchanged, while analysts anticipated inflation to turn positive from a negative 0.1% seen in June to a positive 0.1%.
Two of the three measures the Bank of Canada prefers to use in its policy making were also up on a yearly basis. CPI median, which reports the median inflation across CPI components, ticked up by 0.1 percentage point to 1.7%, while CPI trim which removes outliers edged up by an equivalent amount to 1.3%. Finally, CPI common, an alternative measure of underlying inflation that is utilized by the BOC, remained unchanged at 1.4%.
Although headline inflation is still below the 2% BOC target, its recent pickup and the fact that GDP growth continued climbing in the first quarter of the year, heightened the chances for another rate hike to be delivered this year. Moreover, the BOC supported in its July monetary statement that economic growth has become more sustainable, while weakness in inflation is likely to be temporary. However, the bank said that it will wait for further clues on economic conditions before tightening its monetary policy further. Note that the BOC increased rates or the first time in seven years in July.
Looking at the reaction in the forex markets, the loonie hit a fresh two-week high against the greenback, with dollar/loonie sinking immediately by 0.64% to 1.2575. Afterwards, the pair managed to climb to 1.2596.
