Canada's inflation rate dropped to 1.6% in September, down from 2.0% in August, as falling gasoline prices led to the lowest annual rate since February 2021.
The decline in headline inflation was driven by a 10.7% year-over-year drop in gasoline prices, which followed a 5.1% decline in August. Excluding gasoline, inflation held steady at 2.2%. On a monthly basis, overall inflation fell 0.4%, also largely due to gasoline, while core inflation, which excludes more volatile components, remained unchanged at 2.4%.
Bank of America now expects the Bank of Canada (BoC) to cut interest rates by 25 basis points (bp) at its next meeting on October 23, with the risk of a larger 50bp cut.
“Despite the headline figure falling below expectations, steady core inflation and recent positive economic data suggest a 25bp cut remains the most likely outcome,” Bank of America wrote in its note.
Bank of America updated its inflation forecasts, lowering expectations to 1.8% year-over-year by the end of 2024, down from its previous forecast of 2.1%. The bank also continues to expect inflation to reach 2.0% by the end of 2025.
Key factors supporting a rate cut include stable core inflation, strong labor market data—highlighted by a net gain of 46,700 jobs in September—and inflation excluding gasoline remaining unchanged. Bank of America anticipates the BoC will continue reducing rates, bringing them to 3.0% over the next few quarters.
While the possibility of a 50bp cut exists, Bank of America noted that a larger move is unlikely given the absence of a significant deceleration in economic activity.