Canada's Inflation Rate Slows to 1.6%

By Promit Mukherjee and Ismail Shakil

OTTAWA (Reuters) – Canada's annual inflation rate slowed more than expected to 1.6% in September, prompting markets to increase bets of a 50 basis point rate cut next week.

The easing of inflation, mainly led by a huge drop in the price of gasoline, marked the smallest annual increase in consumer prices since February 2021, according to Statistics Canada.

Consumer prices in Canada have eased consistently since the beginning of the year, touching the mid-point of the Bank of Canada's 1%-3% target range last month, as high interest rates suppressed consumer demand and business investments.

The BoC has trimmed its policy rate by 25 basis points at each of its last three policy-setting meetings. Governor Tiff Macklem noted last month the risks that inflation could drop below its target range and that economic growth might weaken, raising hopes for a larger-than-usual 50 basis-point rate cut.

Canadian swap markets increased the odds for an oversized 50 basis point rate cut next week to 67% after the inflation data was released, up from roughly 52%.

> "The Bank of Canada needs to do something to revive the economy and stop inflation from falling too far. Our view is that a 50 basis point rate cut is the right dose of medicine," wrote Royce Mendes, head of macro strategy for Desjardins Group, in a report.

The Canadian dollar weakened to a 10-week low against the U.S. dollar, trading at 1.3833 or 72.29 U.S. cents. Bond yields for the government’s two-year bonds fell 5.4 basis points to 3.164%.

Analysts polled by Reuters had forecast that the inflation rate would cool to 1.8% from 2.0% in August. Month-over-month, the consumer price index decreased 0.4%, compared to a forecast of a 0.2% decline.

Excluding gasoline prices, the inflation rate remained at 2.2% in September, as reported by Statscan.

The central bank's preferred measures of core inflation, CPI-median and CPI-trim, were unchanged. CPI-median stayed at 2.3%, while CPI-trim remained at 2.4%.

In September, seasonal easing of transportation prices also dragged down headline inflation, according to Statscan. Shelter price inflation, which the central bank has identified as an area for cooling, came in at 5.0%, down from 5.3% in August.

Goods prices fell 1.0% annually in September, while services prices were up 4.0%.