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    • Economists predict inflation dipped below 2% in September

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    Economists expect inflation continued its downward trend last month, giving the Bank of Canada the all-clear to continue cutting its benchmark interest rate.

    鈥淲e are looking for headline inflation to cool below the bank鈥檚 two-per-cent target in September,鈥 said BMO economist Shelly Kaushik.

    Kaushik said she expects annual headline inflation cooled to 1.8 per cent, largely thanks to lower gas prices last month, but added that as pump prices rose in October, the headline number could tick higher in the following report.

    The latest report on consumer price growth is set to be released Tuesday, and is the last big economic report before the Bank of Canada鈥檚 next interest rate decision on Oct. 23.

    TD Bank senior economist James Orlando said he sees headline inflation slowing to 1.9 per cent in September, with core measures of inflation remaining above two per cent.

    鈥淣ow that we鈥檙e back at target, it鈥檚 more like, well, how do we stick around here?鈥 he said.

    In August, inflation hit the Bank of Canada鈥檚 two-per-cent target, falling from 2.5 per cent year-over-year in July to reach its lowest level since February 2021. Lower gasoline prices underpinned the decline.

    Underlying inflation pressures are continuing to slow, said Nathan Janzen, assistant chief economist at RBC, but shelter costs, especially mortgage payments, have continued to put upward pressure on the overall number.

    However, that pressure is slowly easing as interest rate cuts begin working their way through the economy, he said 鈥 though the mortgage interest component of inflation will remain high for a while.

    鈥淚t takes time for market rate changes to impact five-year, fixed-rate mortgage payments through renewals, and so you'll still have further increases in mortgage costs. But they are getting smaller,鈥 said Janzen, who also sees headline inflation hitting 1.8 per cent in September.

    The Bank of Canada started hiking interest rates in March 2022 to fight inflation, hitting pause mid-2023 at five per cent before beginning cuts this past June.

    It has now cut rates three times this year and is expected to continue cutting as other areas of the economy, such as the labour market, have weakened.

    However, the labour market was surprisingly stronger in September, adding more than twice as many jobs as in August, while the unemployment rate ticked lower to 6.5 per cent.

    Looking at the broader trend, though, the jobs market has steadily weakened, which is another reason why many economists say the Bank of Canada is all but certain to cut in both October and December.

    The question is how big that cut will be.

    So far, the central bank has only made cuts by a quarter of a percentage point, but recently, its U.S. counterpart kicked off its easing campaign with a more aggressive half-point reduction.

    Orlando sees the Bank of Canada cutting by a quarter-point this month and in December.

    "Nothing in the data right now (is) saying that you need to speed up those rate cuts," he said.

    The Bank of Canada is more focused on the labour market now than on inflation, said Orlando. But Friday鈥檚 jobs report wasn鈥檛 as weak as many feared, he said, and "echoes everything else we've been seeing in the economy, that a quicker pace of rate cuts isn't necessary."

    Some think the central bank could take a more aggressive tack 鈥 Janzen sees two larger-sized cuts of half a percentage point each in October and December, even after Friday鈥檚 jobs report.

    "I think there's just growing evidence that interest rates are higher than they need to be, and potentially substantially higher than they need to be," he said.

    Kaushik said while she forecasts two smaller cuts this year, she thinks a half-percentage-point cut isn鈥檛 out of the question.

    鈥淭he question of 25 versus 50 basis points (is) still very much up in the air,鈥 she said.

    Bank of Canada governor Tiff Macklem signaled in September that the central bank could make more sizable cuts if economic weakness persists.

    "With inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much," he said after announcing a rate cut on Sept. 4.

    Also on Friday, the Bank of Canada鈥檚 latest surveys on consumer and business outlooks found both remained subdued, with consumers less pessimistic about their finances but still reducing spending.

    This report by The Canadian Press was first published Oct. 13, 2024. 

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