Canadian Inflation Slows in September, Dampening Expectations of Rate Hike


Summary: Canada’s annual inflation rate unexpectedly slowed to 3.8% in September, prompting analysts to revise their expectations for an upcoming interest rate hike. The deceleration in inflation was attributed to lower prices for travel-related services, durable goods, and groceries. The Bank of Canada is now less likely to raise interest rates at next week’s policy announcement.

Canada’s annual inflation rate in September came in at 3.8%, surprising analysts who had forecasted a rate of 4.0% based on the previous month’s data. This unexpected slowdown has led to a revision in expectations for an imminent interest rate hike. Analysts now believe that the upcoming policy announcement from the Bank of Canada on October 25th will not include a rate increase. Jules Boudreau, a senior economist at Mackenzie Investments, emphasized that it is clear that the central bank will not be raising rates at this time, and the possibility of a rate hike may be revisited in December.

The deceleration in inflation was driven by lower prices for various items, including some travel-related services, durable goods, and groceries. Notably, gasoline prices saw a 7.5% increase compared to the previous year. The decrease in inflation was also reflected in the underlying core measures. The CPI-median dropped to 3.8% from 4.1% in August, while the CPI-trim decreased to 3.7% from 3.9%.

Market reactions to the data showed reduced expectations for an interest rate hike next week. Money markets now indicate a 23% chance of a rate increase, down from the previous 43%. The Canadian dollar also weakened in response, reaching its lowest level since October 6th.

Although inflation remains nearly double the Bank of Canada’s 2% target, the recent deceleration and lower-than-expected inflation rate will likely prompt the central bank to adopt a more cautious approach. Derek Holt, Vice President of Capital Markets at Scotiabank, highlighted that while the overall trend suggests higher inflation risks, the Bank of Canada could take advantage of the current situation and choose to skip the upcoming meeting. The central bank will provide updated forecasts alongside its rate announcement next week, offering further insights into its future monetary policy decisions.

Tags: Canada, inflation, interest rate hike, core measures, Bank of Canada