(Bloomberg) -- Inflation in Canada fell to the slowest yearly pace since February 2021 and core measures continued to ease, keeping the door open for larger interest rate cuts from the Bank of Canada.
The consumer price index rose 2% in August from a year ago, following a 2.5% increase a month earlier, Statistics Canada reported Tuesday in Ottawa. That’s slower than the median estimate of 2.1% in a Bloomberg survey of economists.
After one of the most aggressive hiking cycles in the central bank’s history, inflation has returned to the 2% target under Governor Tiff Macklem’s watch. Tuesday’s data will bolster the Bank of Canada’s confidence that price pressures are under control and may give it leeway to accelerate the pace of interest rate cuts.
“Inflation has been brought to heel in Canada and it’s time for monetary policymakers to make a bigger splash,” Royce Mendes, managing director and head of macro strategy at Desjardins Securities, said in a report to investors.
“We expect central bankers to slash their policy rate by 50 basis points next month in an effort expedite the return to a more neutral setting.”
The inflation print is the first of two reports before the Bank of Canada’s next rate decision on Oct. 23. After the release of the data, traders in overnight swaps upped their bets for a larger-than-normal reduction at that decision, putting the odds of a 50-basis point cut at just over a coin flip.
Bond yields fell, pushing the two-year Canada benchmark yield to 2.880%. The loonie slipped to a low of C$1.3617, on pace for its fourth day of losses, as of 9:22 a.m. in Ottawa.
On a monthly basis, the index fell 0.2%, versus expectations for a flat reading, and rose 0.1% on a seasonally adjusted basis.
The central bank’s two core inflation measures decreased, averaging a 2.35% yearly pace, from 2.55% a month earlier, matching expectations. A three-month moving average of those measures fell to an annualized pace of 2.4% from 2.8% in July, according to Bloomberg calculations.
August marked the eighth straight month of headline rates running within the central bank’s target range.
“This is a milestone we’ve all been waiting for,” Andrew DiCapua, senior economist with the Canadian Chamber of Commerce, said in a statement. “With inflation slightly below the Bank of Canada’s expectations, they may now seriously consider cutting rates by a larger amount.”
Annual inflation slowed largely due to gasoline — gas prices fell outright and were also impacted by base effects, Statistics Canada said.
Prices declined in five of eight subsectors on a monthly basis, which could trigger worries about deflation among central bank officials if it becomes a trend. Macklem has recently said the bank cares as much about undershooting the 2% inflation target as it does overshooting it.
The Bank of Canada has already cut rates three times since June, bringing the benchmark overnight rate to 4.25%, and officials have signaled more to come. Economists see mounting weakness in the labor market, and some of them are calling on policymakers to start making bigger moves to bring down borrowing costs.
Earlier this month, Macklem reiterated that officials may cut rates by 50 basis points or more if inflation and the economy slowed faster than expected. But he also said they could decide to pause cuts if growth is stronger or inflation is persistent.
Officials have warned that base effects may keep inflation elevated above the target toward the end of this year.
“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,” Andrew Grantham, an economist with Canadian Imperial Bank of Commerce, said in a report to investors.
CIBC continues to forecast a further 200 basis points of interest rate cuts between now and the middle of next year, Grantham said.
Markets expect rates in Canada to fall to about 2.5% by July of next year — more than 50 basis points lower than they were pricing a month ago.
“Inflation is no longer the main worry for the Bank of Canada,” Charles St-Arnaud, chief economist at Alberta Central, said in an email. With the job market “holding the economy together,” the strength of the next jobs report will likely determine whether the central bank cuts by 25 or 50 basis points, he said.
In August, mortgage interest costs and rent remained the biggest contributors to the annual change in the rate of inflation. Mortgage interest costs rose 18.8% and rents increased 8.9%. Excluding shelter, the consumer price index rose 0.5% from a year ago, versus 1.2% in July.
Excluding food and energy, the index rose 2.4% from a year ago. Services inflation rose 4.3%, while goods fell 0.7%.
--With assistance from Jay Zhao-Murray, Carter Johnson and Randy Thanthong-Knight.
(Revises and adds more economist comment starting in paragraph three.)
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