Canadian CPI falls to 1.6% in September, increasing chance of half-point rate cut
The latest Canadian inflation numbers have come in lower than expected, blowing the door wide open for a jumbo-sized rate cut next week.
Statistics Canada reports the Consumer Price Index (CPI) rose just 1.6% year over year in September, marking its smallest uptick since February 2021, when the measure increased by 1.1%. Slowing gas prices are the main factor behind the softer reading, falling -10.7%, a much deeper decline than the -5.1% drop recorded in August. With the volatile gas component stripped out, CPI rose 2.2%, unchanged from the previous month. On a monthly basis, the measure fell by -0.4%, following -0.2% in August.
Analysts had largely anticipated a September reading of 1.8%, and the report comes in well below the Bank of Canada’s 2% inflation target.
Despite this, StatCan points out that Canadians “continue to feel the impact of higher price levels for day-to-day basics”. Rent costs remain one of the largest contributors to the CPI, now sitting 21% higher than they did in 2021. On an annual basis, however, the growth in rent costs is starting to slow, up 8.2% in September compared to 8.9% in August.
Canadians are also feeling the squeeze from grocery prices, with the cost of food purchased from stores sitting 20.7% higher than three years ago. In September specifically, food prices are up 2.4% annually, the same growth pace as August. StatCan says this is the second month in a row that food costs have outpaced that of headline inflation.
However, the effects of the BoC’s first few rate cuts are starting to show up in the data; mortgage interest costs (MIC), the largest line item in the CPI basket of goods, dropped to year-over-year growth of 16.7%, down from 18.8% in August. MIC growth has been falling for 13 consecutive months, down from the peak hit in July 2023, following the central bank’s steep 10-part rate hiking cycle.
What does this mean for mortgage borrowers?
That inflation is now falling below the BoC’s 2% target range means the central bank will need to take quicker action with interest rates to prevent too much of an economic slowdown. While another rate cut is already firmly expected in the Bank’s October 23 announcement, today’s report increased the chance of a half-point decrease, compared to the 0.25% cuts it implemented in June, July, and September. Should that come to fruition, Canada’s overnight lending rate – the benchmark interest rate that in turn sets pricing for lenders’ prime rates and variable borrowing rates – will fall to 3.75%, its lowest since December 2022.
That in turn would lower most lenders’ prime rates to 5.95% from the current 6.45%. Variable mortgage rates – which are priced based on prime plus or minus a percentage – would fall in kind. Other types of prime-based banking products – including high-interest savings accounts and guaranteed investment certificates (GICs) – would also see their rate of return decrease.
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Signs point to a half-point rate cut to come
Markets and analysts have been waffling in recent weeks as to whether a larger interest rate cut could be coming. Speculation kicked off when the US Federal Reserve cut its own interest rate by a half-point – its first decrease in four years – on September 18.
However, various economic reports have raised doubts – The US’s own inflation report out last week showed American CPI rose by more than expected, and job reports both north and south of the border have shown unexpected resilience in the labour markets – all things that can put upward pressure on inflation, and prompt central banks to tighten up their benchmark interest rates.
But this latest inflation report has firmly pointed expectations back toward a larger cut; the lower headline number is also accompanied by solid progress in the BoC’s preferred “core” measures, which it watches closely when determining its next monetary policy steps. The CPI median – which measures the value at the middle of price changes within the CPI basket of goods – remain unchanged at 2.3%, while the CPI trim – which cuts out the most extreme price changes – also stayed flat at 2.4.%
Overall, writes RBC Economic Claire Fan, the BoC is most likely to slash its benchmark rate by a half per cent next week. In an economic note following the report’s release, she states, “On the cusp of the next BoC interest rate decision on October 23, the latest CPI report showed inflation pressures continuing to slow in Canada as expected in September. The drop in headline CPI reading may have been driven lower by lower gasoline prices but slower growth in the slew of Bank of Canada’s core inflation measures also pointed to progress.”
She adds that while shelter inflation is still the fastest-growing component in the CPI basket, that growth has now normalized to pre-pandemic conditions.
“Taken together with the third quarter release of the BOS survey last Friday that pointed to further unwinding in inflation pressures in the future, we think there’s little reason for the BoC to turn their worries back from a weakening economy to inflation, and expect them to go ahead with cutting by 50 bps next week,” she adds.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.