Canada’s annual inflation rate slowed to 2 per cent in August, landing on the Bank of Canada’s 2 per cent target and leaving the door open for more aggressive interest rate cuts.
The easing in the Consumer Price Index (CPI) marks the slowest annual pace of price increases since February 2021. Analysts polled by Reuters had expected the Consumer Price Index (CPI) to cool to 2.1 per cent from 2.5 per cent in July.
The Bank of Canada’s closely-watched measures of core inflation (CPI-median and CPI-trim) also eased in August. CPI-median fell from 2.4 per cent in July to 2.3 per cent in August, while CPI-trim dropped from 2.7 per cent in July to 2.4 per cent. On a monthly basis, CPI fell 0.2 per cent in August. Seasonally adjusted, CPI was 0.1 per cent higher than July.
The Bank of Canada lowered its benchmark interest rate by 25 basis points to 4.25 per cent earlier this month, leaving the door open to further cuts while warning the Bank needs to guard against the risk that inflation falls below its target, which is a range of between 1 and 3 per cent. Bank of Canada Governor Tiff Macklem said at its last interest rate announcement that “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.”
Money markets are fully pricing in two 25 basis point rate cuts in as many monetary policy meetings remaining in the year, according to Reuters, and expectations of a jumbo 50 basis point cut next month increased to 47.5 per cent from 46 per cent before the inflation data were released.
“The weaker headline reading, with inflation finally back to the 2 per cent target for the first time in over three years, will reinforce expectations for the Bank of Canada to cut rates further. The question markets are grappling with is whether the next move will be 25 basis points or 50 basis points,” BMO Canadian rates and macro strategist Benjamin Reitzes wrote in a research note, adding that because the central bank highlighted downside growth risks as a key concern, GDP figures “loom large in the 25 vs. 50 debate.”
“Today’s figure tilts the scales a touch toward a more aggressive path, but there’s still another CPI report before the next meeting. If we get another big downside surprise, calls for a 50 basis point cut will only grow louder.”
Desjardins managing director and head of macro strategy Royce Mendes wrote in a report on Tuesday that “now that inflation is back to target, it’s time for the Bank of Canada to accelerate the pace of rate cuts.”
“We expect central bankers to slash their policy rate by 50 basis points next month in an effort to expedite the return to a more neutral setting,” Mendes wrote.
“The market is still only placing a 50 per cent probability on a non-standard reduction in October, but there’s no reason to wait for December after seeing these numbers. We expect market pricing to move further in the coming days after the Fed is out of the way.”
Macklem said earlier this month that if the economy and inflation is significantly weaker than expected that it could be appropriate to cut rates by more than 25 basis points.
Statistics Canada said on Tuesday that gasoline helped pull back inflation, due to a combination of lower prices and base-year effects. Mortgage interest costs and rent were the top contributors to August’s increase. Mortgage interest costs have been the largest contributor to headline inflation in Canada since December 2022.
“Even though much of the easing relative to July was due to lower gasoline prices, there was good news within core measures as well,” CIBC economist Andrew Grantham wrote in research note on Tuesday.
“The bottom line then is that inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate.”
With files from Reuters.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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