Ottawa: Canada’s annual inflation rate dropped to the central bank’s 2% target in August, the smallest increase since early 2021, according to Statistics Canada.
This unexpected cooling has sparked optimism that the Bank of Canada might deliver a significant interest rate cut next month, with many economists anticipating a 50 basis point reduction in October.
The potential cut would aim to bring the economy back to a neutral interest rate, estimated between 2.25% and 3.25%, where rates neither stimulate nor restrict growth, as noted by the Toronto Star.
Royce Mendes, head of macro strategy at Desjardins Group, pointed out that the central bank is likely to act quickly to prevent inflation from dropping below target, a sentiment echoed by other experts, according to CTV News.
Factors leading to reduced inflation
The drop in inflation was largely driven by a decline in gasoline prices, telephone services, and clothing and footwear costs.
Gasoline prices, which contributed the most to the fall in inflation, fell by 5.1% and those for clothing and footwear fell by 4.4%.
Shelter costs, making up nearly 30% of the consumer price index (CPI), increased by 5.2% in August, down from 5.7% in July. This rise was mainly due to higher mortgage interest payments and rents.
Mortgage costs eased to 18.8% from 21% in July, while rent climbed to 8.9% from 8.5%. According to Statistics Canada, these two components were the biggest contributors to the overall CPI increase in August.
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Slowing economic growth and rising unemployment
Canada’s economic growth has also been slowing, with third-quarter GDP expected to fall to half of the Bank of Canada's original forecast, while unemployment has risen to a seven-year high, excluding the pandemic years.
Randall Bartlett, senior director of Canadian economics at Desjardins, noted in a CTV News report that the gradual rise in unemployment and slower economic growth indicate that high interest rates may be cooling the economy more than expected.
This reinforces the likelihood of a 50-basis-point rate cut by the Bank of Canada in its next meeting. The Bank has already lowered its key policy rate by 75 basis points this year, reducing it to 4.25%