After months of hope that cooling prices might pave the way for another interest rate cut, September’s inflation data has thrown a wrench into the Bank of Canada’s plans. The country’s annual inflation rate rose to 2.4 percent a noticeable jump from 1.9 percent in August and while that may not sound dramatic, it’s enough to make policymakers think twice before easing up on rates again.
This latest Consumer Price Index (CPI) report is the last major piece of economic data before the Bank’s October 29 policy meeting, and it couldn’t have come at a more awkward time. For weeks, markets had been confidently betting on a 25 basis point cut, which would have lowered the benchmark rate to 2.25 percent. But the new numbers have cast doubt on that narrative.
The culprits behind this inflation bump aren’t exactly shocking. Gasoline prices, which have been falling since the federal government scrapped the carbon levy, didn’t drop as much as they did a year ago. That smaller decline was enough to push the overall inflation figure upward. Meanwhile, food prices always a sensitive topic for Canadians rose 3.8 percent compared to last year, marking the biggest annual increase in grocery costs since April.
In a sense, the inflation story here is more about what’s not getting cheaper than what’s getting more expensive. Shelter costs, particularly rents, also continue to rise 4.8 percent year-over-year adding to the financial strain many households already feel.
Economists are now split on what comes next. Douglas Porter, chief economist at BMO, called the report a “setback,” warning that it complicates the Bank’s decision-making just as markets were “baking in” another rate cut. His tone suggests the Bank may hold steady rather than risk fuelling another round of price pressures.
But not everyone is ready to abandon the dovish outlook. TD’s Andrew Hencic argues there’s still room to cut rates, pointing to a sluggish economy, rising unemployment, and a “fraught” economic outlook. In his view, the Bank can afford to give the economy a bit more breathing room without reigniting runaway inflation.
At the moment, traders still see roughly a 69 percent chance of a rate cut down slightly from earlier expectations but far from off the table. The real question now is whether Governor Tiff Macklem and his team are willing to look past this inflation blip and trust that underlying price pressures will continue to ease.
One thing is clear: the Bank of Canada’s balancing act has become even trickier. Inflation may be cooling from its pandemic-era highs, but the path to stable prices and steady growth is proving anything but smooth.
As Canadians continue to pay more at the grocery store and struggle with stubbornly high rents, the central bank must decide whether to double down on patience or risk tightening the screws on an economy already losing momentum. Either way, next week’s decision will speak volumes about how much faith the Bank still has in its soft-landing story.
