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Forecasters are expecting the Bank of Canada to move ahead with another interest rate hike in July, even as they expect the annual inflation rate to slow significantly.

Statistics Canada is set to release its consumer price index report for May on Wednesday, providing the most up-to-date inflation reading ahead of the Bank of Canada’s interest rate decision on July 12.

“I think this release is probably going to be a fairly optimistic one for inflation, in the sense that we are expecting the inflation rate to go down below 4%,” said James Orlando, TD’s director of economics.

On the food inflation front, Orlando is also hopeful that price increases may be slowing more meaningfully.

“We haven’t had the same deceleration of food prices as the U.S. has had on a monthly basis recently. And so that’s something that you’re kind of hoping that’s gonna start coming through in Canada as well,” he said.

In April, grocery prices were 9.7% higher than a year ago.

Inflation ticked slightly higher to 4.4% in April, marking the first increase since last summer. The report sparked concern at the Bank of Canada that progress on inflation was slowing, despite its aggressive interest rate hikes since March 2022.

But next week’s release is expected to show inflation once again on the decline, with BMO forecasting Canada’s inflation rate fell a full percentage point to 3.4% in May.

“A good chunk of that [decline] is just because prices rose so much a year ago,” said Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO.

Economists have been widely expecting the annual inflation rate to fall sharply this year because of base year effects, which refers to the impact of price movements from a year ago on the calculation of the year-over-year inflation rate.

Reitzes said inflation falling closer to 3% will likely make Canadians feel better about the inflation outlook and potentially help with future inflation expectations, but it doesn’t fully quash the Bank of Canada’s worries.

Most forecasters, including Orlando and Reitzes, are expecting the Bank of Canada to raise interest rates again in July, doubling down on its rate hike in June. That’s because they don’t expect the Bank of Canada’s main concerns — core inflation and a strong economy — to be alleviated.

“The reason why the Bank of Canada decided to raise rates aggressively in its last meeting, and why they’re probably going to raise rates again in July, is because the Canadian consumer keeps spending,” he said.

Earlier this month, the Bank of Canada announced a quarter of a percentage point rate hike that brought its key rate to 4.75% — the highest it’s been since 2001.

The decision to raise interest rates again, despite announcing a pause earlier in the year, was prompted by a string of hot economic data that raised concerns at the central bank that the journey back to 2% inflation may take longer than previously expected.

Economic growth in the first three months of the year was higher than anticipated, driven in part by strong consumer spending, which was up 5.8%.

“As Canadians keep spending, those price pressures keep increasing,” Orlando said. “That’s why I think they’re probably going to raise in July.”

The Bank of Canada has also been closely monitoring core inflation, which strips out volatility from the measure. Reitzes expects core inflation actually accelerated last month, serving as more bad news to the central bank.

The Bank of Canada has not given financial markets any hints on which way it is swaying. Instead, it’s indicated that it plans to base its July decision on income data.

But with only one month of data to work with, Reitzes says it will take weak results on all fronts to convince the Bank of Canada to not raise rates.

“Unless you get uniformly weak data, it looks pretty likely that they’ll have to push rates higher once again,” he said.