CANADA’S annual inflation rate slowed significantly more than expected to 2.9 per cent in January and core price measures also eased, data showed on Tuesday (Feb 20), bringing forward bets for an early interest rate cut.

It was the first time in seven months that headline inflation has dipped below 3 per cent. That prompted money markets to hike bets for a rate cut in April to 58 per cent from 33 per cent before the figures were published.

The Bank of Canada’s next policy announcement is Mar 6. Analysts polled by Reuters had forecast inflation to tick down to 3.3 per cent from 3.4 per cent in December.

“It will certainly raise the odds on an April rate cut,” said Karl Schamotta, chief market strategist at Corpay.

Month-over-month, the consumer price index was unchanged, compared with a forecast of a 0.4 per cent rise.

Two of the Bank of Canada’s (BoC) three core measures of underlying inflation also edged down. CPI-median slowed to 3.3 per cent, lowest since November 2021, while CPI-trim decreased to 3.4 per cent, lowest since July 2021.

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The easing of prices across several categories and in core measures – which the bank follows closely – is likely to give confidence to the Bank of Canada (BoC) that keeping borrowing rates at a 22-year high of 5 per cent is helping in cooling price pressures.

It had said last month after its policy meeting that while the discussion now is for how long the rates have to be kept up, it did not completely rule out rate hikes either, citing persistence in underlying inflation.

“The key takeaway here is that Bank of Canada can seriously consider cutting rates,” Doug Porter, chief economist at BMO Capital Markets.

The BoC has projected headline inflation to remain around 3 per cent in the first half of 2024, before cooling down to 2.5 per cent by the end of the year and reach its target of 2 per cent year after.

The BoC kept its key overnight rate at 5 per cent in January and said that while underlying inflation was still a concern, the bank’s focus is shifting to when to cut borrowing costs rather than whether to hike again.

The central bank had said last month that while high interest rates have helped to bring down red-hot prices, which touched a peak of 8.1 per cent in June 2022, categories such as shelter costs led by rent and mortgage costs, food and wages have maintained underlying pressures on the inflation print.

Shelter price inflation, which includes mortgage interest costs, rent and components related to house prices, accelerated to 6.2 per cent in January from 6 per cent in December. Rents continued to show upward momentum and accelerated 7.9 per cent in January from 7.7 per cent in December.

Food inflation cooled down to 3.9 per cent last month from 5 per cent in December.

Prices of store-bought food rose 3.4 per cent – the slowest pace since August 2021 – also putting downward pressure on headline inflation.

Excluding volatile food and energy, prices rose 3.1 per cent compared with a 3.4 per cent rise in December.

The bank’s next rate announcement is on Mar 6, when the bank is expected to keep its key policy rate on hold at a 22-year high of 5 per cent.

The Canadian dollar reversed an early morning trend and weakened 0.13 per cent to 1.3509 against the US dollar at 1340 GMT.

The largest contributor to headline deceleration in January was lower petrol prices, which fell 4 per cent on an annual basis, Statistics Canada said. Month-over-month, petrol prices fell 0.9 per cent, marking the fifth consecutive monthly decrease. REUTERS