"The mortgage interest cost index (+30.6%) posted another record year-over-year gain and remained the largest contributor to headline inflation" - Statistics Canada. 

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The Pound to Canadian Dollar rate reached August highs after July inflation figures stoked further uncertainty about the outlook for the Bank of Canada (BoC) cash rate and as a softer U.S. Dollar helped lift the Loonie and Sterling in North American trade. 

Canadian inflation had been in an almost 10-month downtrend until Tuesday when it climbed from 2.8% to 3.3% for the month of July while plateauing at 3.2% once food and energy costs are overlooked with both numbers coming in stronger than the economist consensus envisaged. 

Larger than expected monthly increases in the two official measures of inflation drove the uptick but there was better news for the Bank of Canada (BoC) in the details of what drove the stickiness in July, as well as in the trimmed average of price changes having ticked lower from 3.7% to 3.6% that month. 

The latter sits alongside two other refined measures of inflation that are most closely monitored by the BoC though the most pertinent detail in July's report was the one suggesting that rising mortgage costs, which are a byproduct of increases in the cash rate, were the single largest driver of inflation last month. 

"The mortgage interest cost index (+30.6%) posted another record year-over-year gain and remained the largest contributor to headline inflation," Statistics Canada says.

Above: Pound to Canadian Dollar rate shown at 15-minute intervals alongside USD/CAD. Click image for closer inspection. 

Inflation rose just 2.4% during the year to the end of July once the effect of increased mortgage costs is separated, which is more or less in line with the Bank of Canada target and a further indication that the cash rate may already have risen as far as it's likely to. 

"The Bank of Canada's preferred core measures, CPI-trim and median, at 3.6% y/y and 3.7% y/y, respectively, were in line with consensus expectations. Overall, the strength in the underlying core components leaves our forecast for a final 25bp hike from the BoC in September in place," says Katherine Judge, an economist at CIBC Capital Markets.

The BoC raised its cash rate from 4.75% to 5% in July while citing signs of "more persistent excess demand in the economy" in a monetary policy decision that followed a spate of official figures suggesting resilience in the local economy including strong retail sales growth placing the economy on track for a strong second quarter. 

"The BoC is clearly willing to hike interest rates further if needed. But more signs are starting to point to a weaker economy (output growth looks set to contract in June and the unemployment rate has risen by half a percentage point since April)," says Clair Fan, an economist at RBC Capital Markets. 

"We look for a softening economy to ease inflation pressures further going forward, and expect the odds are still tilted towards the Bank of Canada foregoing another increase in the overnight rate in September," she adds. 

Above: Pound to Canadian Dollar rate shown at daily intervals alongside USD/CAD.

Canadian Dollar rates rose tepidly in North American trade on Tuesday with GBP/CAD and USD/CAD easing from earlier highs but the inflation numbers came at the same time as stronger-than-expected U.S. retail sales data and were accompanied by a widespread easing of previously stronger U.S. Dollar exchange rates.

GBP/CAD had benefited in Europe on Tuesday after Office for National Statistics (ONS) figures suggested wage packets continued to grow at record rates in July while also confirming what would appear to be the first cracks emerging in the overall labour market.

The data has done little to discourage financial markets from betting on further increases in the Bank of England (BoE) Bank Rate, which was raised from 0.1% to 5.25% between December 2021 and August 2023 owing to the inflationary effects of 'supply shocks' created by the pandemic and Russian invasion of Ukraine.

"Events’ have not been kind to the Bank but the instability of the MPC’s reaction function, overly reactive to short-term data flows, inevitably calls into question the validity of the latest ‘dovish’ policy guidance," says Ross Walker, head of global economics and chief UK economist at Natwest Markets. 

"The issue is that on the BoE’s preferred metrics there is a compelling case for further tightening – and even stepping-up that pace of tightening," he adds in a Tuesday note.