Canada’s Inflation Eases in September, Likely Heading Off Rate Hike

According to analysts, the unexpected slowing of inflation likely means interest rates will hold steady for the Bank of Canada's next policy announcement on Oct 25. Photo: d3sign/Getty Images

Canada’s annual inflation rate unexpectedly slowed to 3.8 per cent in September and underlying core measures also eased, data showed on Tuesday, prompting markets and analysts to trim bets for another interest rate hike next week.

Analysts polled by Reuters had forecast inflation to hold steady at the 4.0 per cent rate recorded in August. Month-over-month, the consumer price index was down 0.1 per cent, Statistics Canada said, compared with a forecast for a 0.1 per cent gain.

“It’s pretty clear that (the central bank) won’t be raising rates,” said Jules Boudreau, senior economist at Mackenzie Investments. At the Oct 25 policy announcement, the Bank of Canada “will just say: We’re not hiking this one. We’ll see in December.”

Two of the Bank of Canada’s three core measures of underlying inflation also decreased. CPI-median edged down to 3.8 per cent from 4.1 per cent in August, while CPI-trim decreased to 3.7 per cent from 3.9 per cent.

Money markets trimmed bets for a rate hike next week after the data. They now see a 23 per cent chance for a rate increase next week, down from 43 per cent before the figures.

The Canadian dollar weakened as much as 0.7 per cent, hitting its weakest since Oct. 6 at 1.3702 per U.S. dollar, or 72.98 U.S. cents.

The deceleration in September was broad-based, stemming from lower prices for some travel-related services, durable goods and groceries, Statscan said. A factor driving prices was a 7.5 per cent year-over-year increase in gasoline prices.

Grocery prices cooled for the third straight month, rising at 5.8 per cent — the slowest pace since December 2021. Excluding food and energy, prices rose 3.2 per cent compared with a 3.6 per cent rise in August.

“The inflation risk is skewed higher on a trend basis, but for now the Bank of Canada can be opportunistic and skip next week’s meeting,” said Derek Holt, vice president of capital markets at Scotiabank.

Headline inflation had outpaced expectations in the previous two months, stoking fears that the Bank of Canada’s 10 rate hikes in 18 months might not have been enough to cool prices. At 3.8 per cent, inflation is still nearly double the bank’s 2 per cent target.

The central bank has hiked to a 22-year high of 5 per cent, but it does not see inflation slowing to its 2 per cent target until mid-2025. The bank will issue new forecasts alongside its rate announcement next week.

Bank of Canada Governor Tiff Macklem said last week that the bank would be weighing whether to let previous rate hikes work through the economy or raise again to counter sticky inflation.

(Reporting by Ismail Shakil and Steve Scherer in Ottawa, additional reporting by Fergal Smith and Divya Rajagopal in Toronto; Editing by Dale Smith and Jonathan Oatis)