Credit market-based probabilities of a Bank of Canada rate cut on Wednesday rose following the release of Canadian inflation numbers this morning - which overall were modestly softer than expected.
Based on trading in overnight index swaps markets, traders now see about a 93% chance of a quarter point cut on Wednesday, up from about 87% prior to the inflation report, according to LSEG data.
An additional quarter-point cut is priced into markets by March of next year, and a growing number of economists are also forecasting the Bank of Canada won’t end its monetary easing campaign with Wednesday’s rate decision.
Canada’s annual inflation rate rose 1.9% in August, and on a monthly basis, the consumer price index was down 0.1% in August. Analysts polled by Reuters had forecast the annual inflation rate at 2% in August from 1.7% in July, and on a month-on-month basis to increase by 0.1% from 0.3% in the prior month. Core readings of inflation, meanwhile, were relatively in line with expectations.
Here, in detail, is how implied probabilities of future interest rate moves stood in swaps markets after the inflation report. The current overnight rate is 2.75 per cent. While the bank moves in quarter-point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.
Here’s what they looked liked just prior to today’s data:
Prior to today’s data, about 80% of economists believed the Bank of Canada would pull the trigger on a rate cut Wednesday, according to a Reuters survey published Friday. Here’s how they are reacting this morning in written commentaries:
Andrew Grantham, executive director and senior economist with CIBC Capital Markets
“Inflation remained largely unthreatening in August, making the expected Bank of Canada interest rate cut tomorrow a relatively easy decision. While headline inflation accelerated to 1.9%, from 1.7% in the previous month, that was largely due to base effects and was actually slightly lower than the consensus expectation (+2.0%). On a monthly basis prices were down by 0.1% NSA (consensus 0.0%) and up by a trend-like 0.2% after seasonal adjustment. Excluding food and energy, prices rose by a modest 0.1% SA. While the year-over-year rates of CPI-trim and CPI-median were both unchanged around 3%, the more recent trend has been cooler. After matching 0.2% m/m increases in August, the three-month annualized rates of both are close to 2.5%. With core measures of inflation likely to cool further in the months ahead thanks to the slack building up in the economy and the removal of many retaliatory tariffs on September 1st, we not only expect a 25bp cut tomorrow but also a further reduction at the October meeting.”
Stephen Brown, deputy chief North America economist
“Core inflation pressures remain a bit too strong for comfort, but the slightly firmer rise in the Bank of Canada’s preferred core price measures won’t be enough to prevent it from cutting interest rates by 25 bp tomorrow.
A rebound in headline inflation was always likely in August due to unfavourable base effects, with the better news that the increase to 1.9%, from 1.7%, was a little lower than the consensus estimate that it would rise to 2.0%. That was the result of a 0.2% m/m gain in the seasonally adjusted all-items CPI, only a touch stronger than the 0.1% increase in July. The downside miss was partly due to a large drop in travel tours prices, which contributed to a 0.2% m/m seasonally adjusted decline in the recreation, education & reading category. Shelter prices also rose by an unusually soft 0.1% m/m, as declining new home prices weighed on the replacement costs component and offset a 0.4% gain in the rent index. Transportation saw the largest gain, at 0.4% m/m, but that was almost entirely due to the increase in gasoline prices. The good news for the Bank of Canada was that new motor vehicle prices dropped back, supporting our view that tariff effects are already fading. Indeed, there was little sign of any material upward pressure on goods prices, with household operations, furnishings & equipment prices rising by a softer 0.2% and clothing prices barely rebounding by 0.1%, after their 0.6% fall in July.
Admittedly, the average of CPI-trim and CPI-median still rose at a slightly above-target-consistent pace, of 0.21% m/m, while the average annual rate was unchanged at 3.1%. But the Bank has argued previously that CPI-trim and CPI-median somewhat overstate underlying inflation pressures and, with the timelier three-month annualised rate unchanged at 2.5%, the Bank probably shares our view that the outlook for core inflation is no longer as concerning as it was a few months ago. Accordingly, the Bank is likely to cut interest rates tomorrow and we expect further loosening later this year."
David Rosenberg, founder of Rosenberg Research
“There were no big surprises coming out of today’s CPI report in Canada, giving the BoC the green light to follow the Fed tomorrow with a -25-basis-point rate cut. ... What was really key in the report was that the old way we used to measure the “core index” in Canada, the headline CPI excluding food & energy, rose just +0.1% MoM for the second month running. The YoY trend is at +2.5%, but the six-month trajectory is a snick below a +2.0% annual rate and a mere +1.6% on a three-month basis. Not just that, but the CPIX, which strips out the 8 most volatile items as well as indirect taxes, came in below +0.2% sequentially as well, and the three- and six-month trends are also hovering near the target of +2.0% annualized. The trimmed-mean measure also rose by less than +0.2% and has been edging up at that modest pace in each of the past four months; the median CPI also came in at +0.2% after a +0.1% reading in July. It is clear now that the Bank of Canada’s obsession with trade-induced inflation in recent months was overdone, and it’s time to shift the focus back to a flatlining real economy with widening disinflationary resource slack in the labor market.
All anyone needs to know is that inflation in Canada, excluding the nonsensical mortgage interest component, is running at +1.7% on a year-over-year basis, and has been below +2.0% now each month dating back to April. So when we say the BoC should be cutting rates tomorrow, we are not at all convinced that it will stop there. Bullish for the bond market, less so for the loonie."
Derek Holt, vice-president and head of Capital Markets Economics, Scotiabank
“Canadian core inflation cemented a rate cut by the Bank of Canada tomorrow. That was our call before the numbers ... The figures didn’t hurt the call either as markets now have a cut fully priced and at least another one on the bag of chips theory (you can’t just take one out…). Shops that thought otherwise would presumably be changing their calls now, or would have to come up with some other new reason for holding out. For the BoC to hold tomorrow would need extremely good arguments in order to avoid materially tightening financial conditions by wiping out priced cuts."
Andrew Hencic, director and senior economist, TD
“Momentum in the right direction from inflation this month, as the expected lift from energy prices had a smaller impact than expected. Moreover, even though three of the core indexes moved higher on the month, the trend towards cooler prints remains favourable.
Looking forward, the Bank of Canada should have room to cut at its meeting tomorrow. The economy continues to show signs of waning momentum as the unemployment rate ticks higher and job losses accumulate. Moreover, the termination of many retaliatory tariffs will help provide some offset to price pressures. We maintain the view that the BoC will have room to deliver two cuts this year to support growth and keep inflation in the target range."
David Doyle, head of economics at Macquarie Group
“Underlying measures are likely to moderate further ahead. The output gap is sizeable and has grown in recent months due to labour market softness. Shelter disinflation has further to run. Weak market rents, soft housing activity, and challenged home prices should feed through into measured inflation over time.
Today’s data solidifies a 25 bps cut at tomorrow’s meeting. We continue to see a total of 50 bps in cuts. Our base case is for the second cut to occur in October. Risks to this view are for greater easing with a third 25 bps cut also possible in December or January.”
Douglas Porter, chief economist, BMO Capital Markets
“This report was mostly a low-drama affair, with the major measures rising a tame 0.2% m/m (or less) in seasonally adjusted terms. That pace won’t cause the Bank of Canada much stress, thus keeping them on track for a rate cut at tomorrow’s decision. The milder underlying short-term trends in core, alongside the recent weakening in employment, set the table for further rate relief down the line. However, we suspect the Bank will continue to take it one step at a time, restrained by the 3% y/y trends in some core measures, as well as the likelihood that headline inflation will pop, at last temporarily, in next month’s report.”
Michael Davenport, senior Canada economist at Oxford Economics
“Headline CPI inflation rose 0.2ppts to 1.9% y/y in August, but that likely won’t stop the BoC from lowering interest rates by 25bps tomorrow. ...Underlying price pressures appear to have eased slightly in August. Most measures of core inflation held steady or edged lower compared to July, and the 3-month trend in the monthly rate of core price growth has fallen below the BoC’s 2% target for the first time since November 2024. Overall, this should give the BoC a bit more confidence that underlying inflationary pressures are reasonably contained. ...
The removal of most Canadian counter tariffs on September 1 lessens the upside risks to inflation from the trade war but we still expect headline inflation to rise modestly to the mid-2% range by the middle of next year. With the economy teetering on the verge of recession and labour market slack building, we expect the Bank of Canada will lower rates by 25bps tomorrow followed by a second similarly-sized cut in October."
Royce Mendes, managing director and head of macro strategy, Desjardins
“Any lingering doubts that the Bank of Canada will resume its rate-cutting cycle tomorrow have now been erased. While we don’t expect policymakers will provide any explicit guidance about the final destination for rates, we anticipate the Governing Council will strike a dovish enough tone to nudge market pricing closer to our 2.00% terminal rate forecast.”
Taylor Schleich and Ethan Currie, economists with National Bank Capital Markets
“Canadian inflation in August was a bit cooler than expected but note that there was no clear consensus going into this report. Indeed, there were more estimates for inflation rising 0.1% and falling 0.1% than there were for inflation to remain unchanged (which was ‘expected’). Nonetheless, the Canadian inflation picture doesn’t change much after this release. Prices are rising a bit too much to be consistent with 2% inflation but are not sufficiently hot to constitute something problematic.
When it comes to monetary policy, we didn’t expect this report to change the outcome of tomorrow’s BoC decision and now we’re sure it won’t. The central bank is set to ease for the first time since March. Despite slightly above target “underlying” inflation, accumulating weakness in the labour market and the presumed downward pressure that will put on inflation going forward is the more important factor right now, even if the Bank can’t be as forward looking as it would like. At this point, we also have an October cut penciled in and this data doesn’t jeopardize that call. Another inflation report (on October 21st), jobs data and a monthly GDP report will offer further insight into the Bank of Canada’s policy rate path."
Abbey Xu, economist, Royal Bank of Canada
“Taken together, the data highlight the fine balance the Bank of Canada must strike in its policy decision tomorrow. Evidence of economic softening is apparent: unemployment is rising, and Q2 GDP contracted as trade flows weakened despite robust domestic demand. That said, early signs of recovery are emerging in Q3, with exports and manufacturing and wholesale sale volumes posting gains, suggesting the Q2 slowdown could be temporary.The BoC will also have to consider upside inflation risks from sticky core inflation, resilient consumer spending, and planned fiscal stimulus that is likely more effective at addressing the targeted economic impact of trade-related disruptions than interest rate cuts. Today’s inflation report does little to sway that assessment, and we continue to think the Bank of Canada’s decision tomorrow will be a close call between a 25 basis point cut to the overnight rate and a hold.”
Gisela Young and Veronica Clark, economists at Citi
“The downside surprise in the August CPI print solidifies the case for the BoC to cut policy rates tomorrow as has been our base case for a while now.”
Dr. Nick Rees, head of macro research, Monex Canada
“Canadian inflation data for August broadly matched expectations, seeing annual all-items price growth of 1.9% YoY, and keeping the BoC on track to cut rates tomorrow. Underlying price pressures remain elevated, but showed no signs of strengthening further, meaning that labour market weakness should continue to be the primary focus for policymakers. From a USDCAD perspective, attention now turns to the Governor Macklem for any forward guidance on Canadian rates, and to the FOMC, who are also set to deliver its own rate decision on Wednesday afternoon. The latter, we suspect, will be more consequential for loonie fortunes, given our expectations for a non-committal stance on further easing from the Governing Council. ... Underlying price growth proved little changed in August, enough to ensure a BoC rate cut this month, but sufficiently sticky that the Governing Council is unlikely to pre-commit to a follow up move.”
Charles St-Arnaud, chief economist, Alberta Central
“In recent months, the BoC has put more emphasis on current inflation than on the amount of slack in the economy. However, with signs that the inflation is less sticky and the much bigger amount of slack in the economy than expected at the time of the July meeting, following a bigger contraction than projected in Q2, and two consecutive months of decline in employment and rising unemployment rate, the BoC will turn its focus on the weaker economy. As such, we expect the BoC to cut its policy rate by 25bp at tomorrow’s meeting and bring its policy rate to 2.00% by the end of the year, meaning additional cuts in October and December.”
Bryan Yu, chief economist, Central 1 credit union
“The recent spate weak domestic news, including the Q2 contraction in GDP, severe LFS employment contraction over the past two months, and rising unemployment rate likely had the Bank leaning towards a cut, and the inflation print does little to change the story. With the policy rate above the current 3-month trend, there is room for a 25- basis point reduction. Thereafter, core disinflation is expected to slow further on easing shelter costs and removal of more retaliatory tariffs. The likelihood of Fed cuts in the pipeline will also be supportive of a reduction in the Bank’s policy rate to 2.25 per cent by year end.”