how much will they cut? part II

In last week’s installment of “how much will they cut”, we noted that the September jobs data from Statistics Canada was unlikely to compel the Bank of Canada to move beyond a 25-basis-point cut. We also noted that the September Consumer Price Index (CPI) data would give us a clearer picture of the path going forward—and indeed it has.

Today’s CPI release brought the second consecutive month-to-month decline in inflation, which brought the annual headline rate to 1.6%, below the Bank’s target rate. The biggest contributor to the decline was gasoline, which was down 10.7% from last year. (Though it’s worth noting that oil and gas prices have been increasing so far in October, so there could be some upward pressure on the CPI next month.) The decline in inflation last month wasn’t entirely oil and gas, though, as the CPI for all things excluding energy declined to 2.4% in September from 2.5% in August.

Shelter inflation—which is the largest component of the basket of goods and services that make up the CPI—slowed to 5.0%, its lowest level since June 2023. The main drivers of recent shelter inflation, mortgage interest and rents, both declined in September, to 16.7% and 8.2%, respectively. Mortgage interest costs remain elevated as interest rates remain high, while rental rates are likely increasing much more slowly in reality than is being implied by the CPI.

Further, both of the Bank’s preferred measures of core measures of inflation (which strip out the most volatile elements of the CPI) were unchanged in September with CPI Trim (2.4%) and CPI Median (2.3%).

Today’s CPI reading is the last major data release between now and the Bank’s next rate announcement on October 23rd. It gives us yet another indication that there is slack in the Canadian economy, demand has waned, and there is greater need for lower interest rates. As such, it is our belief that the Bank will want to get back into its projected target range (of between 2.25%-3.25%) sooner rather than later and, with that in mind, we believe this significantly increases the likelihood of (and need for) a 50-basis-point cut next week.