The modestly hotter-than-expected inflation reading for October was enough for money markets to price in higher odds that the Bank of Canada will only cut interest rates by 25 basis points next month.
Implied probabilities in swaps markets now suggest a 72 per cent chance of a 25 basis point cut on Dec. 11, and a 28 per cent chance that the bank will follow up with another jumbo 50 basis point cut, according to LSEG data.
Just prior to the inflation data, markets were pricing in 61 per cent odds of the 25 basis point cut.
Here’s how implied probabilities of future interest rate moves stood in swaps markets following today’s 830 am ET inflation report, according to LSEG data. The overnight rate currently resides at 3.75 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.
The second table to the bottom is a breakdown of probabilities for the size of a cut on Dec. 11.
And here where the probabilities stood just prior to the inflation report:
Markets earlier this month, following a weaker-than-expected Canadian jobs report and an interest rate cut by the Federal Reserve, were signalling there was a greater probability the Bank of Canada would pull the trigger on another 50 basis point cut come December rather than just a quarter point.
But that more dovish interpretation of likely future monetary policy moves didn’t last long, and by last week markets were back to pricing in better odds it would be 25 basis points.
Money markets are now pricing in nearly one full percentage point of more easing by the Bank of Canada by December 2025. That indicates there will be less interest rate relief coming in the months ahead than what had been expected. Earlier this fall, markets were pricing in 150 basis points of more cuts to come by the end of next year.
Canadian dollar trading is reflecting the lower odds of a supersized Bank of Canada cut in December. The currency rose about 0.15 of a cent on the data, to 71.45 cents U.S. There’s some upward pressure on bond yields as well, with the Canada two-year at 3.162 per cent. That’s nearly flat on the day, but with the U.S. equivalent yield currently down by 5 basis points, traders are positioning for more modest central bank easing ahead.
Canada’s annual inflation rate accelerated to 2 per cent in October, a touch higher than the 1.9 per cent average economist expectation, and noteably higher than the 1.6 per cent inflation rise in September. Energy costs and property taxes were attributed to much of the acceleration in inflation.
On a monthly basis, the consumer price index rose by 0.4 per cent after two consecutive monthly declines. The monthly gain also was ahead of market expectations of a 0.3 per cent increase.
This was last inflation data to be released ahead of the Bank of Canada’s interest rate announcement on Dec. 11. The bank has lower its policy rate by 125 basis points over its last four policy setting meetings, including a 50 bps cut in October.
Here’s how economists and market strategists are reacting in written commentaries this morning:
Royce Mendes, managing director and head of macro strategy, Desjardins Securites
As a result of the upside surprise, which suggests a tad more stickiness in inflation than expected, we have more conviction in our call that the Bank of Canada will cut rates just 25 basis points in December. We expect market participants and economists who had been expecting a second consecutive 50 basis point move to migrate to the quarter-point camp.
Douglas Porter, chief economist, BMO Capital Markets
The back-up is no big surprise, as the combination of higher gasoline prices, a meaty annual rise in property taxes, and a tough comparable from a year ago prompted the temporary rise. Still, the report is a bit hotter than anticipated, with both of the Bank of Canada’s main measures of core inflation pushing up by two ticks on a yearly basis—trim to 2.6% and median to 2.5%, with the three month paces a bit warmer still. On a seasonally adjusted basis, the report rained +0.3% m/m increases, with headline, food, and both major core metrics rising at that clip; while not overly concerning, that’s also far from soothing. ...
This heavy result should take some more steam out of the call for another 50 bp rate cut from the Bank of Canada in December. We have been in the 25 bp camp from the start and this report only reinforces that expectation, along with evidence that housing is stirring, the Fed will turn more cautious, and a limping loonie. There are still the important Q3 GDP (next Friday) and jobs reports (following Friday) ahead of the next rate decision on December 11, but we are expecting big upward revisions to GDP, suggesting we’ll need to see a truly tough jobs report to prompt another aggressive cut. At this point, most signs suggest the prudent course of action is a 25 bp rate cut path.
James Orlando, director and senior economist, TD Economics
Today’s data reinforced the message that the Bank of Canda’s (BoC) goal of stabilizing inflation won’t be a smooth path. While the increase in headline inflation was expected, the move higher in core inflation was discouraging. Even worse, on a three-month basis, core inflation moved from just above the BoC’s target, at 2.1%, to 2.8%. That was a big move and points to core inflation remaining above the BoC’s target in the coming months. High inflation for shelter, food, and health care were behind this, and aren’t looking likely to go away any time soon.
The BoC is likely to view today’s data release as a minor setback. Inflation had become a background worry, and while it isn’t raising any red flags yet, today’s data is a reminder that getting price growth to settle at 2% will take time. ... We think that a 25 bp cut remains the most likely outcome, especially given the resilience that the economy has demonstrated over the last few months.
Katherine Judge, senior economist, CIBC
Although the Bank of Canada’s key core metrics, CPI trim and median both accelerated by two ticks to 2.6% and 2.5% y/y, respectively (vs. 2.4% expected for both), some other key exclusionary measures still show very tame prices, with CPIX at 1.7% and CPI ex. shelter at 0.9% y/y. Given that this report follows a string of better news on inflation, and the fact that the GDP and employment data remain to be seen ahead of the December BoC decision, we still see a 50bp cut as possible at the next BoC meeting.
Marius Jongstra, vice president of market strategy, Rosenberg Research
The report really was a property tax story, which surged +2.9% when seasonally adjusted and by a whopping +6.0% on a non-seasonally adjusted basis. This hasn’t happened in 32 years. The BoC will surely look through this as it is not really a price anyone pays at the shopping mall — it is a de facto squeeze on real incomes.
At 3.75%, the BoC rate is still around 100-150 basis points north of neutral and, given where inflation and the unemployment are, the BoC remains behind the curve. The economy is still operating under “excess supply” and one month of data does not change this bigger picture view. There may not be enough in this report to warrant a second -50 basis point cut at the December meeting (market based odds of such a move fell to 35% from 50% just before the release). But with so many indicators squarely within the Bank’s 1% to 3% target rate, a 25 basis point move looks to still be in the cards.
Stephen Brown, deputy chief North America economist, Capital Economics
With headline inflation still at target and given the Bank’s recent emphasis on the need to ensure that GDP growth and the labour market pick up again, the upside surprise to core inflation in October doesn’t fully rule out another 50bp cut next month, but we will be forced to change our forecast to a smaller 25bp cut if the forthcoming third-quarter GDP data or November Labour Force survey also surprise to the upside. ...
Our forecast for headline inflation to average 2.1% this quarter is still in line with the Bank’s assumption from the October Monetary Policy Report but, given the upside surprises to CPI-trim and CPI-median, we now expect an average of those two measures to average 2.5%, 0.2%-points above the Bank’s forecast. Accordingly, the chance of another 50bp cut next month has clearly declined, although it is too soon to rule it out altogether.
Abbey Xu, economist, Royal Bank of Canada
The minutes from the BoC’s last policy decision (50 bp cut to the overnight rate in October) noted that there could be “ups and downs” with inflation. With continuing softness in labour markets, evidenced by declining job openings and rising unemployment, we still expect price growth will drift broadly lower. The BoC is data dependent, and will see another labour market report before the next interest rate decision in December. Our base-case assumes an additional 50 basis point cut to the overnight rate by the Bank of Canada in December.
Matthieu Arseneau and Kyle Dahms, economists with National Bank
Excluding housing, inflation in Canada remained extremely low at just 0.9% in October, indicating an economy in excess supply. Looking at the underlying measures of inflation, October saw an acceleration in the central bank’s preferred indicators, both of which rose at a monthly rate of 0.3% (3.8% annualized), above the central bank’s target. Although the trend over the last three months has been weaker (2.8% annualized), it is still too high in the eyes of the central bank. Does this mean that the Bank of Canada will have to slow the pace of its rate cuts? We don’t think so. It is perfectly normal for inflation to progress in a non-linear fashion and, more importantly, for inflation to react to the economic environment with some lag. In this respect, the economy has been cooling steadily since 2022, as evidenced by the output gap, which is now well below potential GDP, in contrast to the situation in the United States. The labour market is also deteriorating rapidly, as evidenced by the continuous decline in the employment rate over the past six months, and surveys do not point to any improvement in the medium term. The rise in bond yields in the United States, due to revised expectations of rate cuts in the wake of the Republican sweep in the presidential election, is being reflected in interest rates in Canada, which we see as another argument in favour of easing the short end of the yield curve through a lower overnight rate in order to stabilize the Canadian economy.
Charles St-Arnaud, chief economist, Alberta Central credit union
Overall, the Bank of Canada will likely be disappointed by the upside surprise in inflation, but it remains in line with its forecast from the October MPR, which shows inflation in 2024Q4 at 2.1%. The slight uptick in the breadth of inflationary pressures and in the momentum of core inflation suggest a slight increase in underlying inflationary pressures. However, they remain consistent with inflation within the target band. As we wrote earlier (see ), we continue to believe the BoC should accelerate the return to a more neutral monetary policy, especially considering the lacklustre economy and the lack of inflationary pressures. Doing so would allow the BoC to buy some insurance against an economic downturn. With this in mind, we think the BoC should cut its policy rate by 50bp at the December meeting, but we also recognize that the uptick in inflation provides some ammunition to members of the Governing Council wishing for a more cautious approach.
Derek Holt, head of Capital Markets Economics, Scotiabank
This was a relatively hotter inflation report that tentatively scaled back the probability of upsizing December’s likely rate cut but with further important developments still ahead. At this point our call remains -25bps but that could well change. ... More important is that the Bank of Canada’s preferred ‘core’ inflation gauges were quite hot last month.
Bryan Yu, chief economist, Central 1 credit union
Our key takeaway from today’s report is that while inflation continues to normalize and track near the Bank’s target, there may be less disinflationary pressure than previously thought. Several factors could steady price trends even as the Canadian economy slows. Near-term, the U.S. Fed is wavering in its rate cut pivot amidst economic strength and policy risk, contributing to a weaker Canadian dollar. This is likely to lift import prices. The Canadian government’s U-turn on immigration could very well tighten the labour market next year and in 2026 and impede progress to slow wages, while the housing market is showing life, both in volume and prices. We currently expect a 25- basis point cut at the December meeting.
Philip Petursson, chief investment strategist, IG Wealth Management
While modestly higher, the October print does little to change the path of rate cuts for the Bank of Canada. Looking a bit deeper at the data shows more one-time pressures than sticky acceleration of prices. And, as has been the case for a number of months now, excluding shelter costs, CPI is a much more muted 0.9% year-over-year. Our take continues to be that inflation should not be the primary focus for the BoC. CPI is within the Bank’s target of 2% plus or minus 1 and therefore a continued easing to a neutral rate of 2.5% should be the Bank’s final destination. ...
We believe an additional 50 bps cut is appropriate for the December meeting. If the Bank is satisfied with the rate of inflation - and in our view it should be - then the focus needs to turn to the forward path of the Canadian economy and the headwinds of higher unemployment, the coming mortgage cliff and uncertainty following the U.S. election. Economic support rather than an already won fight against inflation is the more important area of focus. The unintended consequence will be a weaker loonie to the USD as we have seen. The message should be clear to the Bank - keep going.
Nick Rees, senior forex market analyst, Monex Canada (foreign exchange firm)
With downside risks looking ahead, and yet further disinflation in the pipeline due to base effects, we remain of the view that inflation risks are still skewed toward below target inflation.
This point is highlighted when zooming out, with inflation looking far from scary in our view. Headline price growth is exactly at the BoC’s 2% target, while today’s upside surprise still only leaves the all-items consumer price index matching the level seen in August, and below its July peak. Meanwhile, dispersion measures continue to point toward disinflation progress, in contrast to headline readings. The number of CPI components rising by more than 3% is almost unchanged this month relative to September.
Taken as a whole then, we are disinclined to write off prospects for a jumbo rate cut next month