With Canada’s inflation rate falling to 1.6 percent in September, lower than the Bank of Canada’s target of 2 percent, there are increasing expectations that steeper interest rate cuts could be likely.
Statistics Canada reported on Oct. 15 that the latest inflation numbers were the consumer price index’s smallest year-over-year increase since February 2021. The 1.6 percent inflation rate was driven by lower gasoline prices, the agency said. It said inflation excluding gasoline was 2.2 percent in September, the same as August’s increase for this metric.
The agency noted that on a monthly basis gasoline prices fell by 2.6 percent in August and 7.1 percent in September. The September decline was due to lower crude oil prices amid rising concerns over weaker economic growth as well as to lower costs associated with the switch to winter blends. Month over month, air transportation prices fell by 14.3 percent in September as the summer travel period came to an end.
Year over year, rent prices increased 8.2 percent compared to 8.9 percent in August, while food prices grew at a faster rate than headline inflation, rising 2.4 percent in both September and August.
September’s inflation numbers came as the Bank of Canada
reduced its interest rates for the third time in 2024 on Sept. 4, bringing its key rate from 4.5 percent to 4.25 percent. That decision was made in response to inflation slowing to
2.5 percent in July on a year-over-year basis, with governor Tiff Macklem noting there was an “overall weakness” in Canada’s economy continuing to pull prices down.
Former Parliamentary Budget Officer Kevin Page, now president and CEO of the Institute of Fiscal Studies and Democracy at the University of Ottawa, said September’s inflation numbers are “good news for price trends and policy” and clear the path for the central bank to cut interest rates further.
“The most important constraints on our growth are high real interest rates, which are dampening spending in consumption and investment,” he said. “Further reduction in the Bank of Canada policy interest rate (which are anticipated) will reduce risks that Canada will experience a recession.”
Projections
The Bank of Canada first began raising interest rates back in
March 2022 in response to high inflation caused by the COVID-19 pandemic, disrupted supply chains, elevated energy prices, and increased government stimulus. Inflation rose to a peak of
8.1 percent in June 2022 from
2.2 percent in March 2021, leading the bank to raise interest rates to 5 percent by July 2023. The bank reduced the key rate to 4.75 percent in
June 2024 and lowered it again by 25 basis points both in July and September.
According to Carleton University business professor Ian Lee, the inflation numbers for September indicate that the “battle for getting inflation back down to 2 percent is over.” However, he said these latest numbers also show that Canada’s economy is “much weaker” and the bank will therefore have to cut interest rates further the next time it’s scheduled to provide an update, on Oct. 23.
“I don’t think there’s any doubt there’s going to be another rate cut in two weeks. And the only question is, is it going to be 0.25 percent or is it going to be 0.5 percent? There’s an increasing number of people who think it’s going to be half of a percent, because the central bank is always a balancing act,” he said.
While the bank will try to keep inflation close to its target of around 2 percent, it’s also cautious about ensuring inflation doesn’t drop too low, as this could trigger deflation, Lee said.
Lee’s prediction is also held by CIBC senior economist Andrew Grantham. In an
Oct. 15 report, Grantham wrote that September’s inflation numbers mean a 0.50 percent interest rate cut in October is likely and that CIBC’s estimate of 2.25 percent for the key rate by mid-2025 “remains unchanged.”
Livio Di Matteo, an economics professor at Lakehead University, said inflation may rise again if the decline in gasoline prices ends up being short-lived, depending on the outcome of the Middle East conflict. Tensions recently heightened across the region as Iran fired some 200 missiles at Israel, which sent
crude oil prices rising in the aftermath of the
Oct. 1 attack, but fell again as Israel reportedly said it would not target Iran’s oil infrastructure.
“I do not think going below 2 percent for just this month is indicative of the economy potentially heading into a recession,” Di Matteo said.
