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On Tuesday, Canada’s annual inflation rate dropped to 2.5% in July, aligning with expectations. Despite this, the Canadian dollar weakened slightly, though USD/CAD slipped 0.1% to close at 1.3620, which was influenced by the significant weakness in the U.S. dollar due to expectations of a potential interest rate cut.
(USD/CAD Daily Price Chart)
The current inflation rate is now the nearest to the Canadian central bank’s 2% target since it reached 2.2% in March 2021, a time when prices started climbing roughly a year after the onset of the coronavirus pandemic.
The Bank of Canada has already reduced its policy rate in the last two meetings, lowering it from 5% to 4.5%. As a result, markets anticipate another 25-basis point cut at the upcoming rate announcement on September 4, with the possibility of three additional 25 basis point cuts by year-end. Many economists are also forecasting a similar rate reduction path, which could bring the benchmark rate down to 3.75% by the end of the year.
(Benchmark interest rate and year-on-year change in CPI inflation)
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