The Canadian inflation rate fell to its lowest in more than three years last month, once again setting up the potential for further interest rate cuts.
Statistics Canada’s consumer price index on Tuesday showed headline inflation at 2% in August, down from a 2.5% gain in July and the lowest since February 2021. The slowdown in the August inflation rate was greater than expected by analysts and economists, who were expecting a reading of 2.1%.
With the inflation rate now at its preferred target following a long post-Covid battle against rising prices, the Bank of Canada is expected to continue to whittle away at its key policy rate, which now stands at 4.25% after three consecutive cuts of 25 basis points each.
However, the bigger question now for the Bank of Canada will be whether it begins to cut more deeply. The Bank will make its next rate announcement next month, with some economists suggesting a 50-basis point reduction could be in the cards.
The Bank of Canada rapidly increased its policy rate from 0.25% in March 2022 to 5% in July 2023 before beginning the current easing cycle in June of this year. Headline inflation in Canada reached a 40-year high in 2022, peaking at 8.1% in June.
The August slowdown in inflation was partially due to lower gasoline prices, while clothing and footwear prices also declined month-over-month.
In a macroeconomic snapshot released earlier this month, Farm Credit Canada said it is expecting the Bank of Canada’s key overnight lending rate to fall to 3.75% by the end of this year, before settling at around 2.5% by the end of 2025.
