The Bank of Canada may have cut interest rates too much and too quickly based on the persistence of core inflation in the Canadian economy, according to one Bay Street economist.

“The (Bank of Canada) prided itself for having been earlier to ease than most other central banks, but arguably cut too far and too fast without concrete evidence that core inflation was waning,” Derek Holt, vice-president and head of capital markets economics at

Bank of Nova Scotia , said in a note. Policymakers trimmed rates back to 2.75 per cent from five per cent over seven consecutive decisions starting in June 2024. The Bank of Canada’s neutral range for interest rates, where they neither stimulate nor depress economic activity, is 2.25 to 3.75 per cent.

“The Bank of Canada has not yet won the fight against past drivers of

inflation , let alone forward-looking uncertainties that could keep it sticky and policy is now arguably too loose going into major uncertainties surrounding inflation risk,” he said.

Core inflation remains stubbornly elevated at the top end of the Bank of Canada’s target range of one to three per cent, according to Statistics Canada’s

consumer price index (CPI) data released this week. For example, core CPI trim and CPI median, measures closely watched by policymakers, came in at three per cent and 3.1 per cent, respectively, leaving their three-month annualized rates at 3.5 per cent, according to Capital Economics Ltd.

Headline inflation accelerated year over year in June 1.9 per cent and up from 1.7 per cent. Excluding energy, however, it heated up 2.7 per cent. Tariff-induced inflation showed up in such categories as clothing and footwear, furniture and vehicles.

“I don’t think they (the Bank of Canada) had the information to go that low (to 2.75 per cent),” Holt said. “I would have preferred that they stopped at around at least three and a half, three and three quarters, and then evaluated, taking a breath and evaluated, waited for further incoming data before acting any further.”

Where policymakers went wrong, Holt said, is they overestimated their ability to forecast the “output gap,” which refers to what an can economy produce versus what it is producing, and then overestimated the output gaps importance.

“It turns out, there are multiple drivers of inflation,” Holt said.

He thinks Bank of Canada policymakers should have taken a page out of the Bank of England’s playbook where officials are taking breaks in between trimming rates.

June’s CPI data was touted as key to deciding the next rate move.

Market bets on the Bank of Canada cutting interest rates at its July 30 meeting have retreated to practically zero per cent, and bets have been lowered for a cut at the meeting in September, according to overnight interest rate swaps data tracked by Bloomberg.

Bets on when the Bank of Canada will resume cutting rates have been pushed out to the Oct. 29 meeting.

However, a rising number of economists don’t think the Bank of Canada will cut rates again this year at all.

For example, Royal Bank of Canada thinks rate cuts are done for this cycle and Oxford Economics Ltd. also said the Bank of Canada is done for now.

“The Bank of Canada is on an extended policy hold,” at least until spring 2026, Holt said.

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Prime Minister Mark Carney is introducing a series of protective trade measures for Canadian steel mills, including additional limits on imports even from countries with free trade agreements with Canada.

He also said his government will set aside $1 billion from its Strategic Innovation Fund to help steel companies advance new projects and $70 million to help train steel workers and hone new skills, among other policies.

The announcement at a steel plant in Hamilton follows a similar press conference in Ottawa last month when Carney announced a first round of trade protections for Canadian steel mills as a response to United States President Donald Trump’s decision to raise tariffs on steel imports to 50 per cent from 25 per cent.— Gabe Friedman, Financial Post

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Today’s Posthaste was written by Gigi Suhanic with additional reporting from Financial Post staff, The Canadian Press and Bloomberg.

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