Will the central bank hit pause on rate cuts next week?
The annual rate of inflation in Canada jumped to 2.4% last month, increasing chances that the Bank of Canada holds interest rates steady when it meets next week.
Statistics Canada said on Tuesday that the consumer price index (CPI) rose thanks to a bump in food prices and slower price declines at the pump. September’s reading marks a higher increase than economists had expected, with analysts on average having predicted a 2.2% climb.
Rent costs were up 4.8% last month across Canada, while mortgage interest costs ticked upwards by 3.6%. Property taxes and other special charges rose by 6%, while homeowners’ replacement costs slipped by 1.4%.
Bank of Montreal (BMO) chief economist Doug Porter said the latest jump in inflation could give the central bank pause for thought as it weighs up a cut next week.
“Suffice it to say this will make the Bank of Canada’s decision a bit more interesting next week than previously expected,” he wrote. “Markets had been all but baking in a rate cut after Governor Macklem’s dovish remarks and yesterday’s soft Business Outlook Survey.
“We have been on the dovish side of the ledger, calling for the Bank to eventually cut the overnight rate to 2.0% (and possibly lower if trade gets uglier), but were not convinced that October would see another cut. Given today’s setback for core, we’ll stay there for now.”
And Oxford Economics’ senior Canada economist Michael Davenport also said the latest reading calls an October cut into question, although he’s still expecting rates to move lower. “Underlying inflation remains contained and with the economy struggling to grow and slack in the labour market, we expect another 25bp rate cut next week,” he wrote.
Davenport said underlying price pressures are still contained because the share of CPI components moving above the central bank’s target range eased – but he believes a reduction of the Bank’s policy rate to 2.25% next week could be its last for a while.
The central bank is due to meet next Wednesday (October 29) on rates, with a final decision of the year scheduled for December 10.
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