Economists argue that
for September complicates
Bank of Canada
interest rate decision
next week, although they still think politicians will cut spending again.
Bets for a rate cut on Oct. 29 eased slightly after Statistics Canada reported year-on-year inflation reached 2.4 per cent in September, largely due to smaller declines in gasoline prices and higher grocery prices. Annual inflation in August was 1.9%.
Many economists called for inflation to accelerate in September, but not as much as it did. The average estimate of economists tracked by Bloomberg is for inflation to be 2.2 percent.
Markets have reduced the chances of
to nearly 70 percent from 77 percent the day before the release of consumer price index (CPI) data, but expectations of a 25 basis point rate cut that would take the rate to 2.25 percent remain strong.
Here's what economists say the inflation data means for the Bank of Canada and its next interest rate decision.
“A little more complicated”: CIBC
“The larger-than-expected acceleration in the headline consumer price index makes next week's Bank of Canada interest rate decision a little more challenging,” Andrew Grantham, an economist at
“, the note says.
Additionally, the Bank of Canada's two preferred measures for the core consumer price index on an annualized basis—median and book—were 3.2% and 3.1%, respectively. In August they were 3.2% and 3% respectively.
But he said policymakers have recently moved away from focusing on those two metrics and instead turned to a broader range of data, including how widespread the price acceleration is.
Grantham said he believes the averages for the median, trim and some other CPI measures are enough to allay the Bank of Canada's concerns about a “re-acceleration” of those core measures.
“We believe the underlying inflation indicators have been subdued enough and the economy certainly weak enough to justify a further 25 basis point cut by the Bank of Canada next week,” he said.
After that, CIBC believes the Bank of Canada will pull back, partly due to some “lingering” inflation pressures, “but also based on assumptions that economic growth will begin to recover and progress will be made toward a trade agreement that will reduce some of the industry tariffs currently impacting Canadian trade.”
“Mixed situation”: TD
“Core inflation figures were mixed, either rising or remaining unchanged in September,” Andrew Hencich, an economist at
“, the note says.
For example, the consumer price index excluding food and energy remained unchanged at 2.4 percent year over year, while the consumer price index excluding the eight most volatile components was 2.8 percent year over year, down from 2.6 percent in August.
“Core inflation appears to have strengthened over the past two months but remains within the Bank of Canada's target range,” he said. “Adding another hotter month is not a trend.”
The Bank of Canada's inflation target range is one to three percent.
Hencic said the Bank of Canada has room to cut rates again given the “difficult” economic situation and the unemployment rate of 7.1 per cent, up from 6.6 per cent at the start of the year, indicating the economy is in deep slack, “as confirmed by yesterday's business outlook survey.”
“Another reduction”: RBC
“Inflation continues to exceed (the Bank of Canada's) target of two per cent, but that was also true when the central bank cut the overnight rate in September,” Abby Xu, an economist at
“, the note says.
Policymakers cut rates by 25 basis points in September, even though their preferred core inflation target was at three percent or slightly above.
She said other factors should reassure the Bank of Canada that inflation pressures have let off some steam, including higher unemployment, lower inflation expectations recorded in the Business Outlook Survey and the end of Canada's retaliatory tariffs in September.
“Our base case assumes another overnight rate cut in the next week in October,” she said.
That would put the rate at 2.25 percent, which is at the lower end of the neutral range of 2.25 to 3.25 percent, where rates neither stimulate nor slow down the economy.
After that, further rate cuts will be more difficult.
“We expect further interest rate cuts to overtly expansionary levels will be more difficult as inflation remains above target and fiscal policy potentially tightens in support following the passage of the federal budget in early November,” Xu said.
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