Inflation Plunges, Interest Rates to Stay Put: Bank of Canada Warns

Strategic Insights -

Rising household costs and a surge in underlying inflation to above the bank's 2% target have tempered hopes for a quick reduction in interest rates. Despite a record 17.4% drop in gasoline prices, which contributed to a 0.5% decline in consumer prices last month, the Bank of Canada is not expected to lower rates anytime soon. The core inflation rate, which excludes volatile prices, rose to 2.3% - a larger-than-expected increase that has analysts warning of growing inflation dangers.

Key Takeaways:

  • The annual inflation rate dropped to 0.7% in September from 2.1% in August due to a record 17.4% decrease in gasoline prices.
  • The Bank of Canada's measure of underlying inflation, the core rate, surged above the bank's 2% target to 2.3%.
  • Canadians should not expect a quick cut in interest rates, as core inflation remains above the bank's target.
  • Household costs, particularly housing prices in Western Canada, are seen as a major inflation risk.
  • New survey results suggest business confidence in the Canadian economy has plummeted to its lowest level since the 9/11 terrorist attacks.

Statistics:

  • 0.7%: Annual inflation rate in September.
  • 2.3%: Core inflation rate, above the Bank of Canada's 2% target.
  • 17.4%: Record drop in gasoline prices.
  • 0.5%: Decline in consumer prices due to gasoline price drop.
  • 88.88 cents US: Exchange rate of the Canadian dollar against the US dollar.
  • 50%: Increase in housing costs over the year in Alberta.
  • 4%: Increase in housing costs over the year in other provinces.
  • 3%: Increase in tuition fees in Ontario.

Sources:

  • Statistics Canada,
  • Bank of Canada,
  • BMO Capital Markets, quoted by Douglas Porter.
  • TD Securities, quoted by Marc Levesque.
  • Conference Board of Canada, quoted in CanWest News Service article.
  • CanWest News Service article, no date provided.