OTTAWA — Weaker-than-expected inflation and a drop in retail sales helped to fuel speculation Friday about a possible interest rate cut by the Bank of Canada.
While economists say the bar for a cut is high, the economic data did nothing to quell talk about a future rate cut following comments by Bank of Canada governor Stephen Poloz earlier this week that the possibility was actively discussed by the central bank’s governing council.
Bank of Montreal chief economist Doug Porter said the weak economic data may stoke talk that the Bank of Canada will cut interest rates at some point over the next six months.
“I think what we’re going to be watching is what happens to home sales in the next three to four months and what happens to exports in the next few months. I think those really are the keys,” Porter said.
The Bank of Canada downgraded its economic outlook in its fall monetary policy report this week due to expected softness in the housing market and a weak outlook for exports.
The central bank cut its forecast for economic growth to 1.1 per cent for this year, down from its July projection of 1.3 per cent, and lowered its estimate for 2017 to two per cent compared with an earlier call for 2.2 per cent.
Statistics Canada said Friday that the consumer price index was up 1.3 per cent in September compared with a year ago.
The increase was up from a year-over-year increase of 1.1 per cent in August.
Economists had expected inflation to clock in at 1.5 per cent in September, according to Thomson Reuters.
CIBC economist Nick Exarhos said the tame inflation should give the Bank of Canada room to cut interest rates if the economy weakens further.
“The Bank of Canada struck a decisively dovish tone this week, and the latest set of figures on the Canadian economy give reason for investors to remain cautious on the Canadian outlook,” Exarhos wrote in a report.
The Bank of Canada’s core index, which excludes some of the most volatile components, increased 1.8 per cent compared with a year ago, matching the gain in August and in line with economists’ estimates.
Prices were up in all eight major components that it tracks, with the shelter and transportation sectors contributing the most to the rise.