(Bloomberg) — Canadian consumer prices grew at the slowest pace in more than three years, tilting the odds in favor of a half percentage point cut by the Bank of Canada next week.
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The consumer price index rose 1.6% in September from a year ago, following a 2% increase a month earlier, Statistics Canada reported Tuesday in Ottawa. That’s slower than the median estimate of 1.8% in a Bloomberg survey of economists.
After the release, traders in overnight swaps upped their bets that the Bank of Canada will opt for a larger rate cut at next week’s decision, putting the odds of a half-percentage-point reduction at about 75%. Previously, the odds were around 50%.
The loonie fell to a session low of C$1.3839 per US dollar. The selloff reversed in the hour after the release, but the Canadian dollar was still on track for a 10th day of losses versus the greenback, the longest streak since 2017. Canadian debt rallied across the curve, outperforming US Treasuries and pushing the two-year Canada benchmark yield to 3.005% as of 9:39 a.m. in Ottawa.
Tuesday’s data marks the first time since February 2021 that inflation is below the central bank’s 2% target and is the ninth straight month of headline rates running within its target range.
With inflationary pressures continuing to ebb and policymakers focusing more on preserving economic growth, the data give the central bank options to reduce rates at a quicker pace after cutting borrowing costs at 25 basis points at each of the past three meetings.
On a monthly basis, the index fell 0.4%, versus expectations for a 0.3% decrease, and was unchanged on a seasonally adjusted basis.
Still, there’s some evidence of sticky underlying pressures. The central bank’s two preferred core inflation measures held steady, averaging a 2.35% yearly pace, slightly cooler than expectations. A three-month moving average of those measures fell to an annualized pace of 2.1% from 2.3% in August, according to Bloomberg calculations.
The data prompted Bank of Montreal to switch its call for the central bank’s decision next week to a 50 basis-point cut from 25 previously.
“With back-to-back lower inflation reports and third-quarter gross domestic product poised to come in well below the Bank of Canada’s forecast, BMO is changing our call for next week’s meeting,” Benjamin Reitzes, rates and macro strategist, said by email.
Tuesday’s inflation print is the last key data before the decision on Oct. 23. Before the inflation release, some economists were already expecting a bigger cut to the benchmark overnight rate, which is currently at 4.25%.
“Given the weakness in the economy, it’s clear that our 50 basis-point rate cut call will become the consensus,” Royce Mendes, managing director and head of macro strategy at Desjardins Securities, said in a report to investors. “The Bank of Canada needs to do something to revive the economy and stop inflation from falling too far.”
It’s time for the central bank to “act boldly,” Andrew DiCapua, senior economist at Canadian Chamber of Commerce, said in a statement. “A 50 basis-point cut is warranted. This is the final signal they’ve been waiting for to shift their stance and recalibrate towards a lower policy rate.”
Stephen Brown of Capital Economics also flagged that GDP data suggests much lower annualized growth in the third quarter than the Bank of Canada’s forecast of 2.8%. “The totality of the data should be enough to persuade the Bank to cut by a larger 50 basis points next week.”
Last month, Governor Tiff Macklem reiterated that officials may cut rates by 50 basis points or more if inflation and the economy slowed faster than expected. And last week, former deputy governor Paul Beaudry said he wouldn’t be surprised if the Bank of Canada cut borrowing costs by half a percentage point at its October meeting.
In September, lower gas prices drove the deceleration in price gains. Excluding gasoline, the index rose 2.2% that month, matching the increase in August.
Excluding shelter costs, the consumer price index rose 0.4% from a year ago, versus 0.5% in August.
Mortgage interest costs and rent remained the biggest contributors to the annual change in the rate of inflation. But prices for rent in September increased at a slower pace, rising 8.2% versus 8.9% in August.
Tuition fees, priced annually in September, also grew at a slower pace, rising 1.8% compared with 2.5% last year.
Regionally, inflation is now at or below 2% in every province, with prices rising at a slower pace in September compared with August in all 10 provinces.
–With assistance from Jay Zhao-Murray and Carter Johnson.
(Updates market reaction, adds more economist reaction starting in paragraph four.)
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