Easing inflation has likely “closed the door” to further rate hikes

Canada’s headline inflation rate eased more than expected in October, likely shutting the door to any further immediate rate hikes, economists say.

Statistics Canada reported Tuesday that headline CPI eased to an annual growth rate of 3.1%, down from +3.8% in September. That puts inflation just outside of the Bank of Canada’s neutral target range of between 2% and 3%.

While some of that was due to base effects—i.e. a lower inflation reading a year ago—it was also impacted by a 7.8% decline in gas prices and continued deceleration in goods prices, which eased to +1.6% from 3.6% in September.

The Bank of Canada’s preferred measures of core inflation, CPI-trim and CPI-median, also eased to annualized rates of +3.5% (from +3.7%) and +3.6% (from +3.9%), respectively. On a three-month annualized basis, these measures came in at 3.2% and 2.7%, respectively.

On the other hand, services prices rose to an annualized rate of 4.6% (from 3.9% in September), and shelter costs continue to exert upward pressure on overall inflation.

Rent prices were up 1.4% compared to September--the largest monthly increase since 1983, while property taxes were up 4.9% year-over-year, the largest increase since 1992.

No further rate hikes expected

"Overall, today's result drives home the point that there is no need for further BoC tightening, especially with the economy already struggling to grow at all and underlying inflation calming,” wrote BMO’s Douglas Porter.

Randall Bartlett, Senior Director of Canadian Economics at Desjardins, said that with economic growth at a near-standstill and with the unemployment rate rising, excess demand in the economy is "slowly being brought to heel.”

"As such, we think the Bank of Canada is likely to remain on hold for the foreseeable future, with its next move expected to be a rate cut around the middle of 2024,” he wrote.

Rate-cut forecasts being moved up

In response to October’s inflation numbers and a general weakening of economic indicators across the board, markets moved to price in growing odds of Bank of Canada rate cuts in the first half of the year.

Bond markets also see a greater chance of multiple quarter-point rate cuts by September.

CIBC economists also noted that core measures of inflation should continue to decelerate due to weak domestic demand, "allowing policymakers to start cutting interest rates as early as Q2 next year.”

BMO’s Porter, however, said it may still be too soon to declare victory in the Bank of Canada’s war on inflation, with more months of data still needed. 

"Before the Bank can even begin seriously considering rate relief, we'll need to see more evidence that services inflation is also moderating—that could be at least another six months down the road,” he added.