Economists optimistic BoC will hold rates
September slowdown could support central bank’s continued pause
A decline in Canada’s annual rate of inflation to 3.8 per cent in September could be just the news needed to support a continued interestrate pause by the Bank of Canada at their policy decision meeting next week, economists say.
Statistics Canada’s monthly Consumer Price Index report released Tuesday pointed to a “deceleration” in grocery and durable good prices as helping drive the CPI down. Gas prices, however, rose at a faster pace in September compared with the same time last year. Excluding gas, the inflation rate was even lower at 3.7 per cent.
The results came in slightly below economists’ expectations, as most forecasted little change from August, when the annual rate of inflation rose to four per cent. A consensus of economists recently surveyed by Bloomberg estimated the rate would stay there.
“I would be cautiously optimistic,” Douglas Porter, chief economist at the Bank of Montreal, said. “I don’t think anybody is going to let their guard down. I certainly don’t think we can start talking about interest rate cuts yet. But there’s nothing here that says the Bank of Canada has to raise rates.”
A report by National Bank of Canada economists Matthieu Arseneau and Alexandra Ducharme supported this view, saying they “continue to anticipate economic lethargy over the next twelve months without any further BoC tightening.”
This is the last major piece of economic news before the Bank of Canada’s interest rate announcement Oct. 25.
The policy interest rate currently lies at five per cent.
Last Friday, bank governor Tiff Macklem said a rate hike was still on the table, citing sticky core inflation over the last six to eight months.
While September’s headline inflation is lower than the 8.1 per cent inflation recorded in June 2022, it’s still higher than the Bank of Canada’s target of two per cent.
Central bankers also monitor the labour and housing markets when measuring the temperature of the economy.
In September, employment rose by 64,000 jobs in Canada, while the unemployment rate remained at 5.5 per cent for the third month in a row, indicating a softening labour market. Soaring borrowing costs are also seeping through the real estate market, as the Canadian Real Estate Association recently cut its forecast for home sales and prices this year.
While another rate hike might not be on the horizon, businesses are still feeling the pinch of high prices “with elevated inflation expectations remaining a complicating factor,” Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, said in a statement.
In the Bank of Canada’s thirdquarter edition of its Business Outlook survey, firms reported their pricing practices are not yet back to normal, and that they plan to increase prices more than they did before the pandemic — but at a slower pace than in the last 12 months.
In the discretionary services category of the CPI report, consumers are paying less for airfares as well as travel tours due to more offerings of flights in the last year, said Andrew Barclay, an analyst at Statistics Canada.
But all three affordability indexes — food, shelter and transportation — are still elevated, despite the lower headline inflation, he said.
The pace of growth of grocery prices slowed to 5.8 per cent in September compared with a 6.9 per cent increase in August. Food prices have declined for two consecutive months, which signals the start of a trend, said Barclay.
He said items such as pasta, edible oils, processed cheese and fruit juices saw the largest year-overyear price increases.
The price growth of new passenger vehicles softened with a rise in inventory in the last year, the report stated. Prices also decelerated in household operations, furnishings and equipment; clothing and footwear; health and personal care; and recreation, education and reading.