1) (Updated) Annual inflation falls to 1.6% in September, raises odds of 50-basis-point rate cut

Courtesy Barrie360.com and Canadian Press

By Craig Wong, October 15, 2024

Signage marks the Statistics Canada offices in Ottawa on July 21, 2010. Statistics Canada is expected to publish its latest reading for inflation today. THE CANADIAN PRESS/Sean Kilpatric

The chances of a half-percentage point interest rate cut by the Bank of Canada became more likely Tuesday after Statistics Canada reported annual inflation fell to 1.6 per cent in September.

Economist Tu Nguyen of accounting and consultancy firm RSM Canada said she had expected the inflation rate to remain close to the central bank’s two per cent target, where it was in August, for a few more months.

“This is one of the instances where I’m happy to be wrong,” she said.

Nguyen said while the Bank of Canada has favoured a slow and gradual pace of 25-basis-point cuts each time, the inflation report raises the odds of a 50-basis-point reduction.

“It’s clear that we are well behind the curve when it comes to rate cuts,” she said.

The inflation report is the last major piece of economic data before the Bank of Canada’s interest rate decision on Oct. 23 when it will also update its economic forecasts in its monetary policy report.

It also came after stronger-than-expected job numbers for September that found the economy added 47,000 jobs as the unemployment rate fell to 6.5 per cent.

However, Nguyen said the jobs data has fluctuated a lot from month to month and “it seems like the September job report is the exception rather than the rule.”

Statistics Canada said Tuesday lower gasoline prices were the main driver of the drop in the overall inflation rate for September as drivers paid less to fill up than they did last year.

Gasoline prices in September fell 10.7 per cent compared with a year earlier. Excluding gasoline, the annual pace of inflation was 2.2 per cent in September.

Royal Bank of Canada economist Claire Fan noted shelter costs are still growing at a faster rate comparing to the rest of the consumer basket. 

“But the scope of price pressure outside of shelter has now normalized more fully to what it looked like before the pandemic,” Fan wrote in a report.

Rent prices increased at a slower pace in the month but remained elevated as they rose 8.2 per cent compared with a year ago following a year-over-year gain of 8.9 per cent in August.

Mortgage interest costs in September were up 16.7 per cent compared with a year-over-year gain of 18.8 per cent a month earlier.

Statistics Canada said prices for food purchased from stores rose faster than headline inflation at 2.4 per cent in September, the same rate as in August. Prices for fresh or frozen beef gained 9.2 per cent, while edible fats and oils rose 7.8 per cent and eggs increased five per cent.

Prices for food purchased from restaurants rose 3.5 per cent compared with 3.4 per cent in August.

The Bank of Canada has cut its key interest rate three times so far this year to bring it to 4.25 per cent.

Governor Tiff Macklem has said it is reasonable to expect more interest rate cuts are coming, given the progress made on inflation, but the pace and timing of cuts will depend on the central bank’s evaluation of the economic data.

In September, Macklem signalled a willingness to change the pace of cuts, if circumstances warrant.

2) Economists predict inflation dipped below two per cent in September

Courtesy Barrie360.com and Canadian Press

By Rosa Saba, Published October 13, 2024

Economists expect inflation continued its downward trend last month, giving the Bank of Canada the all-clear to continue cutting its benchmark interest rate. 

“We are looking for headline inflation to cool below the bank’s two-per-cent target in September,” said BMO economist Shelly Kaushik. 

Kaushik said she expects annual headline inflation cooled to 1.8 per cent, largely thanks to lower gas prices last month, but added that as pump prices rose in October, the headline number could tick higher in the following report.

The latest report on consumer price growth is set to be released Tuesday, and is the last big economic report before the Bank of Canada’s next interest rate decision on Oct. 23. 

TD Bank senior economist James Orlando said he sees headline inflation slowing to 1.9 per cent in September, with core measures of inflation remaining above two per cent.

“Now that we’re back at target, it’s more like, well, how do we stick around here?” he said. 

In August, inflation hit the Bank of Canada’s two-per-cent target, falling from 2.5 per cent year-over-year in July to reach its lowest level since February 2021. Lower gasoline prices underpinned the decline.

Underlying inflation pressures are continuing to slow, said Nathan Janzen, assistant chief economist at RBC, but shelter costs, especially mortgage payments, have continued to put upward pressure on the overall number.

However, that pressure is slowly easing as interest rate cuts begin working their way through the economy, he said — though the mortgage interest component of inflation will remain high for a while. 

“It takes time for market rate changes to impact five-year, fixed-rate mortgage payments through renewals, and so you’ll still have further increases in mortgage costs. But they are getting smaller,” said Janzen, who also sees headline inflation hitting 1.8 per cent in September. 

The Bank of Canada started hiking interest rates in March 2022 to fight inflation, hitting pause mid-2023 at five per cent before beginning cuts this past June. 

It has now cut rates three times this year and is expected to continue cutting as other areas of the economy, such as the labour market, have weakened.

However, the labour market was surprisingly stronger in September, adding more than twice as many jobs as in August, while the unemployment rate ticked lower to 6.5 per cent. 

Looking at the broader trend, though, the jobs market has steadily weakened, which is another reason why many economists say the Bank of Canada is all but certain to cut in both October and December.

The question is how big that cut will be. 

So far, the central bank has only made cuts by a quarter of a percentage point, but recently, its U.S. counterpart kicked off its easing campaign with a more aggressive half-point reduction. 

Orlando sees the Bank of Canada cutting by a quarter-point this month and in December. 

“Nothing in the data right now (is) saying that you need to speed up those rate cuts,” he said. 

The Bank of Canada is more focused on the labour market now than on inflation, said Orlando. But Friday’s jobs report wasn’t as weak as many feared, he said, and “echoes everything else we’ve been seeing in the economy, that a quicker pace of rate cuts isn’t necessary.” 

Some think the central bank could take a more aggressive tack — Janzen sees two larger-sized cuts of half a percentage point each in October and December, even after Friday’s jobs report. 

“I think there’s just growing evidence that interest rates are higher than they need to be, and potentially substantially higher than they need to be,” he said. 

Kaushik said while she forecasts two smaller cuts this year, she thinks a half-percentage-point cut isn’t out of the question. 

“The question of 25 versus 50 basis points (is) still very much up in the air,” she said. 

Bank of Canada governor Tiff Macklem signalled in September that the central bank could make more sizable cuts if economic weakness persists. 

“With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much,” he said after announcing a rate cut on Sept. 4.

Also on Friday, the Bank of Canada’s latest surveys on consumer and business outlooks found both remained subdued, with consumers less pessimistic about their finances but still reducing spending.