The consumer price index saw a bigger jump than economists had expected. Is an oversized December rate cut now off the table?
Canada’s inflation rate jumped back up to 2% in October, a bigger-than-expected increase that could cast doubt over the possibility of an oversized interest rate cut by the Bank of Canada next month.
Statistics Canada said on Tuesday morning that the consumer price index (CPI) had risen from 1.6% in September, with the overall figure coming in slightly higher than the 1.9% expected by economists polled in a Bloomberg survey.
Mortgage interest and rent costs remain two of the most prominent contributors to overall yearly price growth, at 14.7% and 7.3% respectively, although both are continuing to cool from prior months.
While gas prices dropped in October, the pace of the decrease was slower than the previous month – and two core inflation measures closely watched by the Bank of Canada gathered steam, accelerating at an average annual clip of 2.55%.
Will the inflation increase lead the BoC to change its rate cut approach?
With the overall CPI still firmly within the central bank’s target range of 1-3%, and the economy continuing to slow, there seems little chance that decisionmakers will opt to hit pause entirely on rate cuts in the Bank’s final decision of the year, scheduled for December 11.
Nor does the larger-than-anticipated increase completely rule out the prospect of a 50-basis-point cut next month, although it’s likely to give Governor Tiff Macklem food for thought as he weighs up whether an oversized reduction is needed.
Royal Bank of Canada (RBC) noted in its preview of today’s StatCan release that it believes inflation is “more likely to drift broadly lower” in Canada, with nothing to indicate that it’s set to surge significantly higher than 2%. That means a jumbo cut is in the cards next month, according to bank economists Nathan Janzen and Abbey Xu.
“Given the Canadian economy’s weak momentum, we continue to expect the BoC to cut the overnight rate by an additional 50 basis points in December,” Janzen and Xu said.
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