Following the release of weaker-than-expected October inflation data, markets are growing more confident that the Bank of Canada’s rate-hike cycle is officially over.

They’re also raising the odds that the central bank will be forced to start lowering rates by the first half of next year, with a 76% chance of the first rate cut by March.

This morning, Statistics Canada reported that headline CPI inflation fell to an annualized rate of 3.1%, now just a tick outside of the BoC’s neutral target range of 2% to 3%. That’s down from 3.8% in September.

There was also continued progress with the Bank’s closely watched measures of core inflation, which strip out food and energy prices. CPI-trim eased to 3.5% year-over-year (from 3.7% in September), while CPI-median slowed to 3.6% from 3.9%. Looking at the three-month annualized change, these measures came in at 3.2% and 2.7%, respectively.

12-month change in headline inflation

Markets move up rate-cut calls, but economists warn patience is needed

Today’s inflation data is the latest in a line of weakening economic data. It follows a slowdown in consumer spending and housing activity, a 20-year low in residential mortgage growth and a rise in the unemployment rate.

Bond markets have responded by moving up the timeframe for the first Bank of Canada rate cut. They are now pricing in 76% odds of the first rate cut by March, and 78% odds of two quarter-point cuts by June.

And for the first time, odds are now up to 54% that the Bank will deliver three cuts by September, which would bring the overnight target rate back down to 4.25%.

But some economists say the Bank of Canada will need further evidence that inflation is firmly under control before considering rate cuts.

“Before the Bank can even begin seriously considering rate relief, we’ll need to see more evidence that services inflation is also moderating—that could be at least another six months down the road,” wrote Porter.

Economists at RBC, meanwhile, believe the Bank will “cautiously pivot to cuts” over the second half of 2024.

Inflation report not all good news

Not all components of the inflation report were positive, with services prices remaining “sticky” while shelter prices continued to rise.

Shelter prices were up 6.1% year-over-year, slightly up from the 6% pace in September. It was driven in part by a 1.4% surge in rent prices, which BMO’s Porter noted was the largest monthly rise since 1983.

“As well, there was yet another chunky 2.5% rise in mortgage interest cost, leaving them up a towering 30.5% year-over-year,” he wrote.

On top of that, he pointed out that October is the month when annual property tax changes are captured, which posted a “meaty” 4.9% rise, up from 3.6% in 2022. “This large increase will linger in the inflation rate for a full year,” he noted.

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Last modified: November 21, 2023