Another rate cut is coming, RBC says

RBC economist Abbey Xu said in an Oct. 21 note that Canadian inflation edged higher in September, with headline consumer prices rising 2.4% year-over-year, up from 1.9% in August and slightly above expectations for a 2.3% increase.

She said the acceleration was mainly driven by a smaller decline in energy prices compared to earlier months, while the Bank of Canada’s core inflation measures remained firm “with CPI-trim and CPI-median both hovering slightly above 3% year-over-year and accelerating slightly on a three-month rolling average basis.”

Inflation continues to run above the BoC’s 2% target, “but that was also true when the central bank cut the overnight rate in September.”

Xu noted that the breadth of inflationary pressure narrowed slightly in September, as a higher unemployment rate, lower business inflation expectations from the BoC’s own survey, and the removal of most Canadian counter-tariffs reinforce the view that upside risks have eased.

“Our base case assumes one more reduction in the overnight rate next week in October,” she said. “That would leave the overnight rate at the lower bound of its estimated neutral range (2.25%), a rate that is not adding to or subtracting from inflation pressures over time. Cutting beyond that, into outright stimulative levels, will be more difficult with inflation still sticky at an above-target rate and fiscal policy potentially ramping up as a support after the federal budget in early November.”

Most of the September uptick, Xu said, came from a smaller year-over-year drop in energy prices (–2.6% versus –8.3% in August). Food costs continued to climb, with grocery prices accelerating and overall food inflation rising to 4% from 3.5% the previous month. Excluding food and energy, inflation held steady at 2.4%.

The BoC’s CPI-trim rose to 2.6% on a three-month rolling average, while CPI-median remained unchanged at 2.7%. The share of CPI basket components with three-month annualized inflation above 3% declined slightly to 47% from 50% in August, suggesting that underlying pressures eased somewhat but remain broad.

Shelter inflation was largely unchanged at 2.6%, though rent inflation reaccelerated to 4.8% from 4.5% in August. Travel tour prices continued to fall, marking a fifth straight monthly decline, but the pace of decrease slowed to –1.3% from –9.3% the previous month.

Xu added that tuition fees, which receive annual updates each September, rose just 1.7%, representing the slowest increase since 1976 (excluding 2019).

-30