Inflation Report Reshapes Market Forecasts for Bank of Canada Rate Cuts
Recent inflation data has prompted money market traders to adjust their expectations regarding the Bank of Canada’s upcoming interest rate decision. Following a report released on October 10, 2023, indications suggest that the Bank may not cut rates as aggressively as previously anticipated.
Latest Inflation Statistics
Canada’s annual inflation rate rose to 2.4% in September, an increase driven mainly by higher food prices and a lesser drop in gasoline costs compared to August. This was revealed by Statistics Canada on October 10. Analysts had predicted a more modest increase of 2.3% from the previous month’s rate of 1.9%.
Monthly Changes Weighed In
- The Consumer Price Index (CPI) grew by 0.1% from August to September after a decline of 0.1% the previous month.
- Excluding gasoline, the CPI showed a 2.6% rise compared to the 2.4% growth in August.
Market Reactions
The data has had a notable impact on market speculation. Traders now estimate a 77% probability of a quarter-point rate cut later this month. This is a decrease from 87% before the inflation report was released. The Bank of Canada’s overnight rate currently stands at 2.50%, unchanged since September 17, 2023.
Despite strong labor reports from earlier in October, which indicated 60,400 new jobs added in September, the market sentiment has shifted again. Confidence is growing that the Bank may implement a cut down to 2.25% as various factors are influencing the decision.
Factors Influencing Rate Decisions
Key considerations include:
- Dovish comments from Bank of Canada Governor Tiff Macklem.
- Statements from Federal Reserve Chair Jerome Powell suggesting rate cuts may be on the horizon.
- Concerns regarding U.S. regional banks and their effects on credit markets.
- Surveys reflecting business and consumer sentiment regarding economic conditions.
Economists’ Insights
Economists offer varied perspectives on the likelihood of a rate cut:
- Andrew Grantham from CIBC Capital Markets believes a cut is probable, supported by subdued core inflation measures.
- Stephen Brown, deputy chief North America economist at Capital Economics, cautions against premature cuts due to core inflation metrics remaining relatively strong.
- Royce Mendes from Desjardins notes that while consumer prices surged, underlying inflation appears stable, suggesting readiness for another cut.
- Michael Davenport from Oxford Economics thinks the Bank will likely cut rates to 2.25%, a position supported by ongoing economic pressures.
As the Bank of Canada prepares for its October 29 meeting, the implications of the current economic landscape continue to evolve. Market participants remain watchful of both domestic economic conditions and international indicators that could sway monetary policy decisions.
