Rise in Inflation Rates to 1.9% Paves Way for Decreased Interest Rates
The Bank of Canada is poised to make a move in the coming months, with analysts predicting at least one, and possibly more, interest rate cuts due to signs of economic weakness, fading inflation momentum, and global trade uncertainties.
The unemployment rate in Canada and Quebec rose to 7.1% and 6% respectively in August, a slight increase from the previous month. This economic contraction, coupled with the recent decision to reduce the overnight rate by 25 basis points and statements from Bank of Canada Governor Tiff Macklem, have sparked speculation about further rate cuts.
The Bank of Canada eased its stance earlier this year, reducing rates from 5% to 2.75% between April 2024 and last March. Economists at CIBC and Oxford Economics have been more definitive in their predictions, suggesting rate cuts this Wednesday and in October.
Economists at BMO and TD also favour a rate cut this Wednesday, with another potential cut in October, while Randall Bartlett from Desjardins predicts three cuts for the remaining three decisions this year. However, Abbey Xu from RBC is not certain that the Bank of Canada will not choose to wait a bit longer before moving on rates.
The inflation rate in August was slightly below the consensus of analysts' expectations at 1.9%, up from 1.7% in July. The Consumer Price Index (CPI) in Canada increased during this period. However, the inflation rate in Quebec was higher at 2.7%, primarily driven by gasoline prices, which saw a significant drop in both Canada (-12.7%) and Quebec (-8.2%).
Other factors pushing up the cost of living for households over the past 12 months include food (+3.3% in Canada and Quebec), shelter (+3% in Canada, +5.1% in Quebec), and the purchase of motor vehicles (+4% in Canada and +4.4% in Quebec). Conversely, the decrease in demand for travel to the United States contributed to the decline in prices for organized travel in August.
The Bank of Canada's primary objective is to maintain inflation at a low and stable level, with a medium-term target of 2%. The Bank had raised its key interest rate from 0.25% to 5% in less than a year and a half.
It remains to be seen whether the new inflation figures will convince the Bank of Canada to proceed with a rate cut this Wednesday. The decision will undoubtedly have significant implications for the Canadian economy.
