Canada's Inflation Cools Further, Giving Bank of Canada More Room to Ease Rates

Canada's inflation rate slowed to 1.9 percent in November, coming in slightly below economists' forecasts and down from two percent in October, reports the Financial Post. This deceleration, driven by price declines across all major components of the consumer price index, is expected to provide the Bank of Canada with further justification for easing its policy rate.

"These metrics allow the Bank of Canada to sustain its easing stance even if it starts to go in 25 (as opposed to 50) basis-point increments," said David Rosenberg, founder and president of Rosenberg Research & Associates Inc., in a note to clients.

The Bank of Canada has been steadily cutting interest rates this year to combat inflation, which has been a major concern for both policymakers and consumers. With inflation now back at or below the central bank's two percent target for several months, economists believe the central bank has gained further latitude to proceed with its easing cycle.

November's slowdown was driven by a diverse range of factors, including a continued decline in mortgage costs, contributing to a moderation in shelter cost growth to 4.6 percent. Meanwhile, food prices rose by 2.6 percent year-over-year, down from 2.7 percent the previous month. Black Friday sales also contributed to lower prices, with household items declining by 0.9 percent.

"While the Bank of Canada will welcome the renewed dip below two per cent for headline inflation, they would prefer that the sticky core trends stayed away this holiday season," noted Douglas Porter, chief economist at Bank of Montreal, in a client note. "Note that the Bank's October monetary policy report forecast for core inflation was an average of 2.3 per cent for Q4 — instead, it's tracking at 2.65 per cent, a notable miss."

Despite the cooling headline inflation, core inflation measures, which the Bank of Canada prioritizes in its policy decisions, remained above the two percent target last month. CPI-trim rose by 2.7 percent and CPI-median came in at 2.6 percent, unchanged from the previous month. CPI-common increased by two percent, down from 2.2 percent in October.

"November's inflation data came in line with the Bank of Canada's expectations for inflation to average close to two per cent over the next couple of years," stated Leslie Preston, senior economist with Toronto Dominion Bank, in a note. However, Preston also cautioned that TD projects inflation to rise above the two percent target next year due to anticipated tariffs from the incoming US administration.

In his end-of-year speech, Bank of Canada Governor Tiff Macklem acknowledged that uncertainties remain regarding both inflation and the broader economy. "With inflation back to two per cent, we are equally concerned with inflation coming in higher or lower than expected," Macklem said. "The economic outlook is also clouded by a major new uncertainty — the possibility the incoming U.S. administration will impose new tariffs on Canadian exports."