The Canadian dollar is on track for a tenth day of declines today and the selling was helped out by CPI at 1.6% y/y compared to 1.8% expected.
The market was evenly split on the question of 25 bps vs 50 bps ahead of the data but the probabilities now sit at 73% for a larger cut in the overnight rate.
CIBC highlights a big reason why:
"Excluding mortgage interest costs, which are still picking up the effects of past interest rate hikes and which most countries exclude from their inflation targets, CPI would have been a mere 1.0% year-over-year in September."
They also note that clothing prices and goods in general are sources of deflation.
Headline inflation may perk up a bit in the months ahead due to higher gasoline prices so far in October, and may even rise back above 2% briefly in early 2025. However, core measures of inflation should continue to decelerate given evidence of slack in the economy, and we think that there's plenty of room for the Bank of Canada to cut interest rates and accelerate growth to prevent an undershoot of the 2% inflation target next year. We now forecast a 50bp cut at the October meeting, and continue to predict an overnight rate of 2.25% by mid-2025.
The next BOC decision is on October 23.
I spoke with Reuters last week about the case for faster Bank of Canada rate cuts.