Is another rate cut going to take place in October as inflation likely dropped significantly in August?

Statistics Canada is set to release inflation numbers for August on Tuesday morning and most economists believe the annual rate likely dropped significantly, pushed by lower gasoline prices.

 

The biggest question? Whether the drop is significant enough to push the Bank of Canada into a half percentage point rate cut at its next meeting in October.

 

A consensus of economists surveyed by Bloomberg believe the annual rate of inflation — as measured by the Consumer Price Index — fell to 2.1 per cent in August, down from 2.5 per cent in July.

 

That’s just above the Bank of Canada’s inflation target of 2.0 per cent.

 

The Bank of Canada has now cut its key overnight lending rate 25 basis points — a quarter of a percentage point — three meetings in a row.

But with inflation dropping so much, they could now be tempted to slash rates even more quickly to prop up a sputtering economy, said CIBC economist Andrew Grantham.

 

“With inflation no longer threatening, the Bank of Canada has plenty of room to cut interest rates and help spur some growth in the economy,” Grantham wrote in a research note.

 

The bank raised rates 10 times between March 2022 and last summer in a bid to wrestle inflation down to its two per cent target. Inflation peaked at 8.1 per cent in June 2022, as the Canadian economy opened back up from COVID-related restrictions.

 

The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving down prices and slowing the economy.

 

Now, as the economy slows and inflation has been heading (mostly) downward, the bank is taking the reverse approach, trying to stimulate growth by cutting interest rates.

 

 

 

 

This article was first reported by The Star