'Too soon to rule out' 50 bps interest rate cut: Economists on ...

CPI report last one out before Bank of Canada's next interest rate decision on Dec. 11

Published Nov 19, 2024  •  Last updated 3 hours ago  •  4 minute read

Some economists still think a 50-basis-point interest rate cut remains a possibility despite an acceleration of inflation in October. Photo by Sean Kilpatrick /The Canadian Press

Inflation in October came in at two per cent, back to the Bank of Canada’s target, but accelerating faster than economist predictions of 1.9 per cent year over year and higher than the 1.6 per cent recorded in September.

Statistics Canada’s consumer price index (CPI) report is the last one available to the central bank before its next interest rate decision on Dec. 11.

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October’s CPI numbers, along with jobs data for November and third-quarter gross domestic product (GDP), will help steer policymakers on whether to cut rates by another standard 25 basis points or make an oversized 50-basis-point cut.

Here’s what economists think the inflation numbers mean for the Bank of Canada and interest rates.

Gas prices fell less in October than they did in September, but the real culprit behind the higher inflation was shelter, economists Matthieu Arseneau and Kyle Dahms at National Bank of Canada said.

“No fewer than three of the housing sub-components were among the top five contributors to annual inflation: mortgage interest costs (first), rents (second) and property taxes (fifth),” they said in a note.

They said inflation was 0.9 per cent excluding shelter in October, signalling that economic output is nowhere near where it could be.

The Bank of Canada’s preferred measures of inflation are still above target on an annualized basis.

“Does this call into question our view that rates should be brought back to neutral quickly? No,” the analysts said. “It is perfectly normal for inflation to progress in a non-linear fashion and, more importantly, for inflation to react to the economic environment with some lag.”

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Overall, they said the economy has been steadily slowing since 2022, while the participation rate in the labour market continues to slide.

National Bank is calling for a 50-basis-point cut by the Bank of Canada in December.

“But our conviction has weakened a bit following this morning’s data,” Arseneau said in an email.

Inflation for October was always expected to come in hotter, Michael Davenport, an economist at Oxford Economics Canada, said in a note, citing “a larger-than-normal increase in property taxes” as helping to accelerate the reading to two per cent.

But he doesn’t think Canadians need to start worrying about inflation rearing its ugly head again.

“Beneath the surface of the October CPI report is a clear underlying disinflationary trend,” he said, pointing out that services and shelter inflation decelerated.

The Bank of Canada’s preferred inflation measures rose in October, “but one month doesn’t make a trend,” he added.

Given the weak economy and slowing labour market, Oxford is predicting policymakers will cut by 50 basis points when they meet next month.

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“We think (the central bank) will continue to normalize monetary policy quickly to guard against downside risks to growth and inflation,” Davenport said.

A 50-basis-point cut to interest rates is still on the table for the Bank of Canada, according to Stephen Brown, deputy chief North America economist at Capital Economics.

“With headline inflation still at target and given the bank’s recent emphasis on the need to ensure that GDP growth and the labour market pick up again, the upside surprise to core inflation in October doesn’t fully rule out another 50 basis point cut next month,” he said in a note.

The GDP data that will be released on Nov. 29 and the November labour numbers will tell the tale, Brown said.

“We will be forced to change our forecast to a smaller 25-basis-point cut if the forthcoming third-quarter GDP data or November Labour Force Survey also surprise to the upside,” he said.

The CPI in October is often an outlier because it includes Statistics Canada’s annual property tax update. But those taxes this year packed an extra punch, with property tax inflation in major cities jumping to “a 32-year high of six per cent from 4.7 per cent.”

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Prices came in hotter than expected in other areas, too, including clothing and footwear, rent and airfares.

The Bank of Canada expects inflation to come in at 2.1 per cent in the fourth quarter, but Brown thinks there’s a chance it will come in hotter at 2.5 per cent.

“Accordingly, the chance of another 50-basis-point cut next month has clearly declined, although it is too soon to rule it out altogether,” he said.

The Bank of Canada called for inflation “ups and downs” in its policy deliberations during its rate decision in October, Abbey Xu, an economist at Royal Bank of Canada, said.

“With continuing softness in labour markets, evidenced by declining job openings and rising unemployment, we still expect price growth will drift broadly lower,” she said in a note.

Mortgage interest costs accounted for 30 per cent of the growth in inflation, Xu said, but that figure is expected to slow as lower interest rates work their way through the system.

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Xu said the number of items in the CPI basket of goods whose prices rose more than three per cent on an annualized basis still remains well below 2022 levels.

“The (Bank of Canada) is data-dependent and will see another labour market report before the next interest rate decision in December,” she said. “Our base case assumes an additional 50-basis-point cut to the overnight rate by the Bank of Canada in December.”

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