By Rosa Saba
“We expect headline inflation to fall below the bank’s 2% target in September,” said Shelly Kaushik, an economist at BMO.
Kaushik said she expects annual headline inflation to cool to 1.8%, largely thanks to last month’s drop in gasoline prices, but added that as pump prices increased in October, the overall figure may increase in the next report.
The latest report on consumer price growth is scheduled to be released on Tuesday and is the last major economic report before the Bank of Canada’s next interest rate decision on October 23.
TD Bank senior economist James Orlando said he expected headline inflation to slow to 1.9% in September, with core inflation measures remaining above 2%.
“Now that we’re back at the objective, the question becomes: well, how can we stay here? » he said.
In August, inflation reached the Bank of Canada’s 2% target, falling from 2.5% year-on-year in July to its lowest level since February 2021. Lower gasoline prices supported this decline.
Underlying inflationary pressures continue to slow, said Nathan Janzen, deputy chief economist at RBC, but housing costs, particularly mortgage payments, continued to put upward pressure on the overall figure.
However, that pressure is slowly easing as interest rate cuts begin to pass through the economy, he said – although the mortgage interest component of inflation will remain high for some time. time.
“It takes time for changes in market rates to impact five-year fixed-rate mortgage payments at renewals, so you will still have further increases in mortgage costs. But they are falling,” said Janzen, who also expects headline inflation to reach 1.8% in September.
The Bank of Canada began raising interest rates in March 2022 to combat inflation, pausing at 5% in mid-2023 before beginning cuts last June.
It has cut rates three times this year and is expected to continue doing so as other sectors of the economy, such as the labor market, weaken.
However, the job market was surprisingly stronger in September, creating more than twice as many jobs as in August, while the unemployment rate fell to 6.5%.
However, looking at the broader trend, the jobs market has been weakening steadily, which is another reason why many economists say the Bank of Canada is almost certain to cut spending in October and December.
The question is how big this reduction will be.
So far, the central bank has only made cuts of a quarter of a percentage point, but recently its US counterpart kicked off its easing campaign with a more aggressive cut of half a percentage point.
Orlando sees the Bank of Canada cut rates by a quarter point this month and in December.
“Nothing in the current data indicates that you need to accelerate these rate cuts,” he said.
The Bank of Canada is now focusing more on the labor market than inflation, Orlando said. But Friday’s jobs report wasn’t as weak as many feared, he said, and “echoes everything we’ve seen in the economy, which is that a faster pace rapid rate reduction is not necessary.
Some think the central bank could take a more aggressive approach — Janzen forecasts two larger cuts of half a percentage point each in October and December, even after Friday’s jobs report.
“I think there’s growing evidence that interest rates are higher than they should be, and potentially much higher than they should be,” he said. -he declared.
Kaushik said that while she anticipates two more modest cuts this year, she thinks a reduction of half a percentage point is not out of the question.
“The question of 25 basis points versus 50 basis points (is) still up in the air,” she said.
Bank of Canada Governor Tiff Macklem indicated in September that the central bank could make deeper cuts if economic weakness persists.
“As inflation moves closer to target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too far,” he said after announcing a rate cut on September 4.
Also Friday, the Bank of Canada’s latest consumer and business outlook surveys found both remained subdued, with consumers less pessimistic about their finances but still cutting back on spending.
This report by The Canadian Press was first published October 13, 2024.
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Bank of Canada CPI inflation economic forecast inflation inflation forecast James Orlando Nathan Janzen Shelly Kaushik The Canadian Press
Last modification: October 14, 2024