Canada’s inflation rate fell to 1.6 percent in September, below the Bank of Canada’s 2 percent target. This decrease has raised expectations of possible steeper interest rate cuts.
Statistics Canada reported on October 15 that the consumer price index saw its smallest year-over-year increase since February 2021. The 1.6 percent inflation rate was attributed to lower gasoline prices, with inflation excluding this factor remaining at 2.2 percent, consistent with August’s rate.
Gasoline prices dropped by 1.6 percent in August and 7.1 percent in September due to declining crude oil prices and lower costs of seasonal blends. Air transportation costs decreased by 14.3 percent as summer travel season concluded.
Rent prices increased by 8.2 percent year-over-year in September, lower than August’s 8.9 percent, while food prices rose at a faster pace, matching headline inflation at 2.4 percent for both months.
In response to inflation slowing to
2.5 percent in July, the Bank of Canada reduced its interest rates for the third time in 2024 on September 4, lowering the key rate from 4.5 percent to 4.25 percent. This move aimed to counter the overall economic weakness affecting prices, according to Governor Tiff Macklem.
Kevin Page, CEO of Ottawa U’s Institute of Fiscal Studies and Democracy, and former Parliamentary Budget Officer, sees September’s inflation figures as positive news for price trends and policy. He believes it paves the way for further interest rate cuts by the Bank of Canada.
“High real interest rates are the main impediment to our economic growth, hampering consumer and investment spending,” Page stated. “Further reduction in the Bank of Canada’s policy interest rate, which is expected, will help mitigate the risk of a recession in Canada.”
Projections
The Bank of Canada began raising interest rates in March 2022 due to high inflation stemming from the pandemic, disrupted supply chains, elevated energy prices, and increased government stimulus. Inflation peaked at 8.1 percent in June 2022 from 2.2 percent in March 2021, leading to a rate increase to 5 percent by July 2023. The bank subsequently reduced the key rate to 4.75 percent in June 2024, followed by further cuts in July and September.
Ian Lee, a business professor at Carleton University, believes that September’s inflation data marks the end of the battle to return inflation to 2 percent. However, he also acknowledges that Canada’s economy is significantly weaker, necessitating further interest rate cuts which are likely to be announced on October 23.
Lakehead University economics professor Livio Di Matteo cautioned that inflation could rise again if the decline in gasoline prices is temporary and dependent on the outcome of Middle East conflicts. Recent tensions in the region, such as the exchange of missiles between Iran and Israel, resulted in fluctuating crude oil prices. Di Matteo does not foresee a recession despite September’s inflation statistics falling below 2 percent.
