Economists confident in December rate cut amid inflation growth

Canada’s inflation remains manageable, analysts say

Canada’s inflation rate saw a modest rise in October, but economists say it’s unlikely to derail the Bank of Canada’s anticipated rate cut next month.

The Consumer Price Index (CPI) increased by 2% on an annual basis, up from 1.6% in September, according to Statistics Canada’s latest report. Despite the decrease, inflation remained within the central bank’s target range.

October’s inflation data isn’t expected to stop the Bank of Canada from cutting interest rates next month, although it may influence how deep the cut will be, economists said.

Tiffany Wilding, managing director and economist at PIMCO, told BNN Bloomberg that the inflation uptick doesn’t derail the case for rate normalization.

“The outlook remains intact for the Bank of Canada to continue to reduce interest rates and bring policy back into more normal territory,” Wilding said. “I do think today’s report probably reduces the likelihood that they cut another 50 basis points.”

Wilding highlighted Canada’s relative economic stability

“We also had a pretty decent retail sales report, so the Canadian economy is by no means crashing, but nevertheless, we are in a period now where the Bank of Canada should continue to normalize policy,” she added.

Core inflation metrics, which the central bank closely monitors, surprised slightly on the upside but stayed within the acceptable range of 1-3%, according to RBC economist Abbey Xu. These figures, combined with another labour market report due before the Bank of Canada’s December 11 meeting, will likely shape the final rate decision.

“Our base-case assumes an additional 50-basis-point cut to the overnight rate by the Bank of Canada in December,” Xu said.

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Tu Nguyen, an economist at RSM Canada, said the economy’s current state of excess supply provides room for the Bank of Canada to act without major inflationary risks.

“The acceleration in Canada’s consumer price index in October will not deter a December rate cut by the Bank of Canada, though the precise size of the cut is up for debate,” Nguyen said, adding that she expects inflation to hover near target levels in the coming months.

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Canada’s inflation rate jumped back up to 2% in October, a bigger-than-expected increase that could cast doubt over the possibility of an oversized interest rate cut by the Bank of Canada next month.

Statistics Canada said on Tuesday morning that the consumer price index (CPI) had risen from 1.6% in September, with the overall figure coming in slightly higher than the 1.9% expected by economists polled in a Bloomberg survey.

Mortgage interest and rent costs remain two of the most prominent contributors to overall yearly price growth, at 14.7% and 7.3% respectively, although both are continuing to cool from prior months.

While gas prices dropped in October, the pace of the decrease was slower than the previous month – and two core inflation measures closely watched by the Bank of Canada gathered steam, accelerating at an average annual clip of 2.55%.

Will the inflation increase lead the BoC to change its rate cut approach?

With the overall CPI still firmly within the central bank’s target range of 1-3%, and the economy continuing to slow, there seems little chance that decisionmakers will opt to hit pause entirely on rate cuts in the Bank’s final decision of the year, scheduled for December 11.

Nor does the larger-than-anticipated increase completely rule out the prospect of a 50-basis-point cut next month, although it’s likely to give Governor Tiff Macklem food for thought as he weighs up whether an oversized reduction is needed.

Royal Bank of Canada (RBC) noted in its preview of today’s StatCan release that it believes inflation is “more likely to drift broadly lower” in Canada, with nothing to indicate that it’s set to surge significantly higher than 2%. That means a jumbo cut is in the cards next month, according to bank economists Nathan Janzen and Abbey Xu.

“Given the Canadian economy’s weak momentum, we continue to expect the BoC to cut the overnight rate by an additional 50 basis points in December,” Janzen and Xu said.