Bank of Canada to Gradually Lower Interest Rates

In August, inflation in Canada at the core level registered a moderate improvement. The trimmed mean and median average inflation gained 0.21% when compared to the previous month, however in comparison to the more subdued growth in the month of July, this is an improvement. On a yearly basis YoY inflation rate eased to 2.35% although the six month trend edged up slightly to 2.5%.

Looking at these figures, one may conclude that there is some kind of stand still, nevertheless there was, too, some improvement. A headline inflation rate registered at 2.0 percent a year on year, which is the mid-range of the Bank of Canada’s (BoC) inflation target band. This is the weakest inflation growth since March 2021.

BoC Rate Cut Uncertainty

Notwithstanding this achievement, the probability of a reduction in the interest rates by the Bank of Canada is low. The BoC is expected by many analysts to move and pronounce a reduction of about 25 basis points on the interest rates through the successive meetings. This would imply that the overnight rate would drop to 2.25 by the end of the third quarter of the year 2025.

The BoC however is not likely to be more aggressive in cutting rates when there is continued wage inflation easing and especially with the recent signs of inflation slowing. October still looks like a cut of 50 basis points is a real possibility if a lot of other rate setting central banks for example the FOMC do it in the week.

The next LFS due on October 11 is very important. Such data were used by BoC’s Tiff Macklem to warn against the overheating of economic growth. This will be useful in knowing whether the BoC will further cut the rates.

There is so much to be covered when it comes to the latest changes in inflation trends. The prices for durable goods began to decrease, falling to 1.8% YoY, which is closer to the U.S. advantageous situation. On the other hand, in the housing sector, growth in a month on month year on year perspective increased by 0.4%, owing largely to increased rents. Market rents, however, moderated to 3.3% in August down from a high of over 10% earlier.

Borrowing costs in the form of mortgage interest rates still continued on the upward trend with an increase of 0.8% on a month on month basis. Such impact however has been countered to an extent by the BoC’s continued rate cuts. Communications marketplace returned to deflationary trends due to the 2.6% m/m decline in prices; a figure blighted by the new Statistics Canada’s method of estimating mobile services.

The prices of food items also experienced some good developments with an increment in the prices by 0.2% m/m. The number of restaurant visits increased by a meager 0.1%. The costs of intra-city travelling, orthodox air travelling exemplified subsided too with a contraction of 2.6%, as a result of bad airline travelling statistics.