Economists expect inflation in September to continue its downward trend, which would give the Bank of Canada the green light to continue cutting its key rate.
“We expect headline inflation to slow below the bank’s 2% target in September,” said Shelly Kaushik, an economist at BMO.
Mme Kaushik said she expects annual headline inflation to fall to 1.8%, largely due to last month’s drop in gasoline prices, but added that with rising price at the pump in October, the overall figure could increase in the next report.
The latest Consumer Price Index report is due out Tuesday and is the last major economic report before the Bank of Canada’s next interest rate decision on October 23.
James Orlando, senior economist at TD Bank, said he expected headline inflation to slow to 1.9% in September. “Now that we’re back on target, the question becomes, how do we stick to it? “, he asked.
In August, inflation hit the Bank of Canada’s 2% target, its lowest level since February 2021 and down sharply from 2.5% in July. The drop in gasoline prices supported this decrease.
Underlying inflationary pressures continue to slow, said Nathan Janzen, deputy chief economist at RBC, but housing costs, particularly mortgage payments, continued to put upward pressure on the overall figure.
However, that pressure is slowly easing as interest rate cuts begin to impact the economy, he said – although the mortgage interest component of inflation will remain high for some time. time.
“It takes time for changes in market rates to impact five-year fixed-rate mortgage payments during renewals, so you will have further increases in mortgage costs. But they are decreasing,” said Mr. Janzen, who also forecasts that headline inflation will reach 1.8% in September.
The Bank of Canada began raising its key rate in March 2022 to combat inflation, pausing in mid-2023 at 5% before starting to cut them last June.
It has now cut its rate three times this year and is expected to continue cutting it as other sectors of the economy, such as the labor market, have weakened.
Stronger employment
The job market was surprisingly strong in September, creating more than twice as many jobs as in August, while the unemployment rate fell to 6.5%.
Looking at the overall trend, however, the labor market has weakened, which is another reason why many economists say the Bank of Canada is almost certain to cut rates in October and December.
The question is how big this reduction will be.
So far, the central bank has only made cuts of a quarter of a percentage point, but recently its US counterpart kicked off its easing campaign with a more aggressive half-point cut.
Mr. Orlando predicts that the Bank of Canada will cut rates by a quarter point this month and in December.
“Nothing in the current data says we need to accelerate these rate cuts,” he said.
The Bank of Canada focuses more on the labor market than on inflation, explained Mr. Orlando. But Friday’s jobs report wasn’t as weak as many feared, he said, and “echoes everything we’ve seen in the economy, which is that a faster pace rapid rate cuts are not necessary.
Some think the central bank could take a more aggressive approach — Mr. Janzen forecasts two bigger cuts of half a percentage point each in October and December, even after Friday’s jobs report.
There is growing evidence that interest rates are higher than they should be, and potentially much higher than they should be.
Nathan Janzen, deputy chief economist at RBC
Mme Kaushik said that while she anticipates two smaller declines this year, she thinks a drop of half a percentage point is not impossible.
Bank of Canada Governor Tiff Macklem indicated in September that the central bank could make deeper cuts if economic weakness persists.
“As inflation approaches the target, we must increasingly protect ourselves against the risk that the economy is too weak and that inflation falls too much,” he said after announcing a rate cut on September 4.
The Bank of Canada’s latest consumer and business outlook surveys on Friday found consumers less pessimistic about their finances but continuing to cut back on spending.