Canada’s annual inflation rate slowed more than expected to 1.6 per cent in September, which has prompted speculation regarding a 50 basis point cut for next week.
The easing of inflation was led primarily by the huge drop in the price of gasoline. It was also the smallest annual increase in consumer prices since February 2001, according to Statistics Canada.
Consumer prices in Canada have consistently eased since the start of the year, reaching the mid-point of the Bank of Canada’s 1 to 3 per cent target range last month as high interest rates weakened consumer demand and business investments.
The BoC has lowered its policy rate by 25 basis points at each of its last three policy-setting meetings. Last month, Governor Tiff Macklem warned of risks that inflation could drop below the target range and economic growth could slow, fueling hopes for a larger-than-usual 50 basis point rate cut.
Following the release of the inflation data, Canadian swap markets increased bets on an oversized 50 basis point rate cut next week to 67 per cent, up from about 52 per cent.
“The Bank of Canada needs to do something to revive the economy and stop inflation from falling too far. Our view is that a 50 basis point rate cut is the right dose of medicine,” Royce Mendes, head of macro strategy for Desjardins Group.
Overall, the case for a 50 basis point cut this month is strong.
The struggling Canadian housing market, particularly in Ontario, and inflation near target suggest no need for overnight rates to stay at 4.25 per cent. However, strong U.S. economic performance and potential spill-overs have tempered aggressive easing expectations.
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Shelter price inflation dropped to 5%
Meanwhile, the Canadian dollar weakened to a 10-week low, falling to 1.3833 against the U.S. dollar, or 72.29 U.S. cents, after the inflation data was released. Government bond yields for two-year bonds dropped 5.4 basis points to 3.164 per cent.
Analysts polled by Reuters had predicted the inflation rate would cool to 1.8 per cent from 2.0 per cent in August. Month-over-month, the consumer price index decreased by 0.4 per cent, exceeding the forecast of a 0.2 per cent decline.
However, excluding gasoline prices, the inflation rate held steady at 2.2 per cent in September, according to Statscan.
In September, the seasonal easing of transportation prices contributed to lowering headline inflation, Statscan reported. Shelter price inflation dropped to 5.0 per cent from 5.3 per cent in August. Goods prices fell by 1.0 per cent annually in September, while services prices increased by 4.0 per cent.
The current Canadian economic situation has important implications for gold and gold miners.
A potential rate cut by the Bank of Canada could weaken the Canadian dollar, boosting gold prices since gold is typically traded in U.S. dollars. This rise in gold prices can enhance revenues and margins for gold miners.
Additionally, with inflation near target levels, gold remains an effective hedge against inflation, and increased inflation pressures could further drive demand. If the market anticipates aggressive monetary easing, investors may seek gold as a safe haven, supporting prices and attracting more investment in companies such as Calibre Mining Corp. (TSE: CXB) (OTCMKTS: CXBMF).
However, a strong U.S. economy may lead to higher operational costs for miners reliant on imported goods, potentially squeezing profit margins.
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