An easier path for Bank of Canada monetary policy

Summary

• Today's release of Canada's September CPI offers a decisive data point, in our view, that should see the Bank of Canada (BoC) step up the pace of monetary easing next week.

• In addition to headline inflation surprising to the downside, broader underlying inflation pressures also remained contained. With activity data subdued overall, and with policy interest rates still some way above neutral and next week's announcement accompanied by fully updated economic projections, we now forecast the BoC to cut its policy rate by 50 bps to 3.75% at its October 23 meeting.

• We expect the BoC to revert to 25 bps rate cuts at its December, January, March and June meetings, for a terminal policy rate of 2.75% by the middle of next year. Relative to our prior forecast, we see the central bank lowering interest rates more quickly and, moreover, view the risks as tilted to even faster monetary easing if growth in economic activity disappoints.

Ongoing disinflation points to faster Bank of Canada rate cuts

Today's release of Canada's September CPI offers a decisive data point, in our view, that should see the Bank of Canada (BoC) step up the pace of easing, and lower its policy interest rate by 50 bps at next week's monetary policy announcement. September headline inflation slowed more than consensus economists expected to 1.6% year-over-year, and while that deceleration was driven by an 8.3% decline in energy prices, there were also indications that underlying price pressures are contained. Services inflation slowed to 4.0%, the smallest increase in services prices since September of last year. Meanwhile, the average core CPI remains close to the central bank's 2% inflation target, rising 2.4% over the past 12 months, by a 2.4% annualized pace over the past six months, and by 2.1% annualized over the past three months.

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