Two 50 bps rate cuts coming this year: What economists say about the latest inflation numbers

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Inflation in September rose 1.6 per cent, the slowest year-over-year increase in more than three years and well below the Bank of Canada‘s target of two per cent.

The consumer price index (CPI) reading is the last major piece of data before the central bank’s next interest rate announcement on Oct. 23.

Here’s what economists and analysts are saying about the latest inflation numbers and what they mean for the central bank and interest rates.

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50 bps cut next week: Alberta Central

Charles St-Arnaud, chief economist with credit union Alberta Central, said the number of components in September’s CPI that increased by more than five per cent fell to 11 per cent, the lowest level since September 2020 and down from 13 per cent in August.

“The decline in the share of components rising by five per cent suggests less extreme upside price pressures in inflation,” he said in a note.

Looking at the monthly inflation data — CPI contracted 0.4 per cent in September — St-Arnaud said it likely puts the three-month annualized change close to the bottom of the Bank of Canada’s target range.

“Overall, the Bank of Canada will welcome today’s report as it confirms that inflation continues to ease,” he said. “We believe the BoC should accelerate the return to a more neutral monetary policy, especially considering the lacklustre economy and the lack of inflationary pressures.”

St-Arnaud expects the central bank to cut its rate by 50 basis points next week and at the next, and final, meeting of the year in December, and then by 25 basis points in January to bring its benchmark lending rate to three per cent, and close to neutral rate territory.

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‘Sticky core’: Corpay

“Underlying pressures remained sticky,” Karl Schamotta, chief market strategist at Corpay Inc., said in a note.

Core inflation, the average of the Bank of Canada’s preferred measures — CPI trim and CPI median — came in at 2.35 per cent, unchanged from August, he said, adding that the core data strips out volatility to help give officials a clearer grasp of where the “price pressure” points are in the economy.

“We’re still not convinced the Canadian economy needs an emergency-scale response, but there is little question today’s data will lower the downside risks associated with moving more aggressively,” Schamotta said.

Bets on a larger-sized cut from the Bank of Canada are rising, with the likelihood of a jumbo-sized 50-basis-point cut increasing to almost 80 per cent from 54 per cent prior to Statistics Canada’s latest release, he said.

‘Behind the curve’: RSM Canada

“It’s clear that the Bank of Canada is well behind the curve when it comes to rate cuts,” Tu Nguyen, an economist at accounting consultancy RSM Canada LLP, said in a note, given the latest inflation data and the “sluggish” growth in 2024.

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So far, the Bank of Canada has taken the path of “gradual” cuts, with three trims of the standard 25 basis points each.

“The data might convince them to speed up as the main concern has shifted from price stability to jobs and growth,” Nguyen said.

Jobs data on Friday took markets by surprise as the economy created more than double the number of positions expected and the unemployment rate fell to 6.5 per cent from 6.6 per cent. But many economists said the details behind the data, including a falling participation rate, showed the labour market was weaker than it looked.

Even though Statistics Canada attributed much of the slowdown in inflation to a drop in gasoline prices, excluding gas and other volatile components left September’s inflation at 2.2 per cent, still within the Bank of Canada’s target range of one per cent to three per cent.

Even if inflation is slowing, that doesn’t mean it’s going away, Nguyen said in her note.

“It’s important to understand that although the rate of price increases has moderated, price levels are permanently higher and not going back down,” she said.

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