Canada Economics Weekly: Markets pricing hikes with sub-target core inflation

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Canada Economics Weekly: Markets pricing hikes with sub-target core inflation

Canada Economics Weekly

24 July 2026 Citi Research

Th renewed rise in oil prices will keep BoC officials cautious on upside inflation risks

for the time being, but lots can change before the next rate decision on September

2nd. Risks to us look very one-sided, with a potential drop in oil prices opening the

door for officials to more explicitly consider more accommodative rates to help

close the output gap.

Of course, officials are expecting a Q2 rebound in GDP growth to be the start of a

more sustained pick-up in activity that will close the output gap without rates

becoming more accommodative. But markets are still pricing around one 25bp hike

this year and close to 75bp of hikes through next year despite all core inflation

measures having fallen below 2% as of June data release this week. The effective

tightening of policy makes us more confident that stronger growth will not be

sustained. We continue to expect 50bp of rate cuts later this year.

Figure 1. Core inflation is slowing in line with softer demand Figure 2. Core inflation has been at or below target for

signals longer than mid-pandemic

5.5 35

Average of CPI-Trim and CPI-Median 8 Average of CPI-trim, CPI-median 2%

2% 30 7

4.5 Firms Indicating Signficant Difficulty Meeting

Demand 2Q MA, 3Q lag (%, rhs) 25 6

5 3.5 20 firms annualized annualized 3 15 of% % 4

%

3 2.5 average

10 3m

2 2

1.5 1

1 0 0

Jun-04 Mar-08 Dec-11 Sep-15 Jun-19 Mar-23 Dec-26 Apr-18 Oct-19 Apr-21 Oct-22 Apr-24 Oct-25

© 2026 Citigroup Inc. No redistribution without Citigroup’s written permission. © 2026 Citigroup Inc. No redistribution without Citigroup’s written permission.

Source: Citi Research, Statistics Canada Source: Citi Research, Statistics Canada