TORONTO – It went better than expected. A 2.1 was assumed a few days ago, but the rate of inflation fell even further, to 2%. The Bank of Canada’s objective was therefore achieved after a tumultuous period with the dizzying growth in prices, led by battles of increasing interest rates. The annual inflation rate therefore fell from 2.5% in July to 2% in August, reaching the lowest level since February 2021.
Statistics Canada’s Consumer Price Index report today attributed the slowdown in part to falling gasoline prices. But clothing and footwear prices also fell month-on-month, marking the first decline in August since 1971, as retailers offered bigger discounts to small shoppers amid slowing demand.
Now, a larger interest rate cut is expected from the Bank of Canada “which should now focus on trying to stimulate the economy and halt growth in the unemployment rate” wrote CIBC senior economist Andrew Grantham, as well as BMO’s Benjamin Reitzes, said today’s data “tipped the scales slightly” in favor of more aggressive cuts: “Calls for a 50 basis point cut are getting louder now”.
The central bank began rapidly raising interest rates in March 2022 in response to the inflation explosion, which had peaked at 8.1% that summer. The Bank of Canada raised its key lending rate to 5% and held it at that level until June 2024, when it made its first rate cut in four years.
A combination of recovering global supply chains and high interest rates have helped cool price growth in Canada and around the world.
Central Bank Governor Tiff Macklem recently signaled that the Bank of Canada itself is ready to increase the size of interest rate cuts if inflation or the economy slows more than expected.
The prime lending rate is currently 4.25%. CIBC expects the Bank of Canada to cut its key rate by 2 percentage points between now and the middle of next year.
Meanwhile, the US Federal Reserve is expected to make its first interest rate cut in four years on Wednesday.