The chances of the Bank of Canada delivering a second ‘oversized’ rate cut next month have taken a hit after Tuesday’s inflation report came in slightly hotter than expected.
The annual headline inflation rate for October climbed to 2.0%, exceeding the 1.9% economists had predicted and up from September’s 1.6% reading. The increase was largely due to higher gas prices, property taxes, and base-year effects, which can distort year-over-year comparisons.
And while fluctuations in the headline reading aren’t unusual, the ‘core’ inflation measures that strip out more volatile items like food and energy prices also ticked up in the month.
As a result, bond markets reduced the odds of a follow-up 50-basis-point rate cut at the Bank’s December 11 policy meeting to 23%, down from nearly 40% before the inflation report.
“This heavy result should take some more steam out of the call for another 50-bps rate cut from the Bank of Canada in December,” wrote Douglas Porter, Chief Economist at BMO. “We have been in the 25-bps camp from the start and this report only reinforces that expectation, along with evidence that housing is stirring, the Fed will turn more cautious, and a limping loonie.”
Still a chance of a half-point cut, some say
However, a repeat of the 50-bps rate cut from September is still on the table.
Several economists point to factors that could make a larger rate cut in December more likely, including key reports—like third-quarter GDP and November’s employment data—that may show a weakening Canadian economy before the Bank of Canada’s next decision.
The central bank has also acknowledged that inflation data will likely have ‘ups and downs,’ making it less likely to rely too heavily on any single month’s results.
“One month doesn’t make a trend, and the Bank has made it clear that it is prepared for some bumpiness in inflation in the near term,” noted Michael Davenport of Oxford Economics. “With inflation on target, a weak economy, and a loose labour market, we still expect the Bank of Canada will cut rates 50bps again in December.”
RBC economist Abbey Xu wrote that RBC’s base-case assumes an additional half-point cut next month. She pointed to the three-month annualized core inflation measures still remaining within the Bank’s 1% to 3% target range, along with continuing softness in the labour market and a rising unemployment rate.
Some, like CIBC economist Katherine Judge, acknowledge the decision could go either way but lean towards a larger move.
“Although this report will be a disappointment for the Bank of Canada, it follows a string of reports that showed more progress than expected,” she wrote. “While that makes the December meeting a closer call in terms of a 25bp or 50bp cut, the slack in the Canadian economy that we expect to be confirmed in upcoming labour market and GDP reports has us retaining our call for a 50bp cut in December for now.”
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Last modified: November 19, 2024
