Bank of Canada Faces Increased Pressure for a Larger Rate Cut as Inflation Declines

The chances of a 50-basis-point interest rate cut by the Bank of Canada have significantly increased, following new data released by Statistics Canada showing that the country’s annual inflation rate dropped to 1.6% in September. This unexpected decline surprised many economists, including Tu Nguyen of RSM Canada, who had predicted that inflation would hover closer to the Bank of Canada’s 2% target, where it stood in August. “I’m glad to have been wrong in this case,” Nguyen remarked, acknowledging the unexpectedly low inflation.

Nguyen also noted that while the Bank of Canada has historically preferred a cautious approach, implementing 25-basis-point cuts, the latest inflation figures suggest that a more aggressive 50-basis-point cut could now be on the table. “It’s evident that we’ve fallen behind the curve when it comes to reducing rates,” she added, implying that a more decisive policy shift may be needed.

This inflation report is the last key economic indicator ahead of the Bank of Canada’s upcoming rate decision on October 23. On that date, the central bank is expected to also release updated economic forecasts in its monetary policy report. The drop in inflation was largely attributed to a decrease in gasoline prices, which were down by 10.7% compared to the same period last year. Excluding gasoline, however, inflation remained somewhat higher at 2.2% in September.

Other consumer costs have shown mixed trends. While rent prices grew at a slower pace in September—rising by 8.2%, down from 8.9% in August—they are still elevated. Food prices have continued to outpace the overall inflation rate, with grocery costs climbing by 2.4% in September, mirroring August’s increase. Notably, fresh or frozen beef prices surged by 9.2%, while edible fats and oils were up 7.8%, and egg prices rose by 5%. Additionally, restaurant food prices saw a slight rise of 3.5% compared to 3.4% in the previous month.

So far, the Bank of Canada has cut its key interest rate three times this year, lowering it to 4.25%. Bank Governor Tiff Macklem has hinted that more rate cuts could be coming, as the bank continues to make progress in reining in inflation. However, the timing and magnitude of future cuts will be data-dependent. In September, Macklem emphasized that the Bank of Canada would adjust its rate-cutting strategy as needed, based on evolving economic conditions.

As the Bank of Canada approaches its next monetary policy decision, all eyes are on whether the central bank will choose to act more aggressively, given the unexpected drop in inflation and ongoing economic uncertainties.

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