Economists say the inflation data for September complicates the Bank of Canada’s interest rate decision next week, though they still think policymakers will cut again.

Bets for a rate cut on Oct. 29 slightly fell after Statistics Canada said year-over-year inflation hit 2.4 per cent in September, mostly due to a smaller decrease in gasoline prices and a rise in grocery prices. Year-over-year inflation in August was 1.9 per cent.

Many economists had called for inflation to accelerate in September, but not by as much as it did. The median estimate from economists tracked by Bloomberg called for inflation to come in at 2.2 per cent.

Markets reduced the odds of a Bank of Canada rate cut to nearly 70 per cent from 77 per cent the day before the consumer price index (CPI) data was released, but expectations of a 25-basis-point trim to take rates to 2.25 per cent remained strong.

Here’s what economists say the inflation numbers mean for the Bank of Canada and its next interest rate decision.

‘A little more complicated’: CIBC

“A larger-than-expected acceleration in headline CPI makes the Bank of Canada’s interest rate decision next week a little more complicated,” Andrew Grantham, an economist at

CIBC Capital Markets , said in a note. In addition, the Bank of Canada’s two preferred measures of year-over-year core CPI — median and trim — came in at 3.2 per cent and 3.1 per cent, respectively. They stood at 3.2 per cent and three per cent, respectively, in August.

But he said policymakers have recently moved away from focusing on those two measures and have instead turned to a broader range of data, including how widely price acceleration is spreading.

Grantham said he thinks the averages of median, trim and a few other CPI measures are contained enough to allay the Bank of Canada’s fears of a “re-acceleration” in these core measures.

“We think that core measures of inflation were just about subdued enough, and the economy is certainly weak enough, to still justify a further 25-basis-point cut from the Bank of Canada next week,” he said.

After that, CIBC thinks the Bank of Canada will step back, partly because of some “lingering” pressure from inflation, “but also on the assumptions that economic growth starts to recover and progress is made towards a trade deal that reduces some of the sector-specific tariffs currently impacting Canadian trade.”

‘Mixed bag’: TD

“Measures of underlying inflation were a mixed bag, either ticking higher or remaining unchanged in September,” Andrew Hencic, an economist at

TD Economics , said in a note. For example, CPI excluding food and energy came in unchanged at 2.4 per cent year over year, while CPI excluding the eight most volatile components was 2.8 per cent year over year, up from 2.6 per cent in August.

“Underlying inflation appears to have firmed up in the past two months, but it remains within the Bank of Canada’s target range,” he said. “Adding one hotter month does not a trend make.”

The Bank of Canada’s target range for inflation is one per cent to three per cent.

Hencic said the Bank of Canada has latitude to cut rates again given the “fraught” economic situation and an unemployment rate of 7.1 per cent, up from 6.6 per cent at the start of the year, which indicates the economy is sitting on plenty of slack, “something yesterday’s Business Outlook Survey reinforced.”

‘One more reduction’: RBC

“Inflation continues to run above the (Bank of Canada’s) two per cent target, but that was also true when the central bank cut the overnight rate in September,” Abbey Xu, an economist at

Royal Bank of Canada , said in a note. In September, policymakers cut rates by 25 basis points even though their preferred measures of core inflation stood at or slightly above three per cent.

She said other factors should convince the Bank of Canada that inflation pressures have let off some steam, including a higher unemployment rate, falling inflation expectations recorded in the Business Outlook Survey and the elimination of Canada’s retaliatory tariffs in September.

“Our base case assumes one more reduction in the overnight rate next week in October,” she said.

That would put the rate at 2.25 per cent, the lower end of the neutral range of 2.25 per cent to 3.25 per cent, where rates neither stimulate nor slow the economy.

After that, further rate cuts are a tougher sell. “We expect cutting beyond that, into outright stimulative levels of interest rates, will be more difficult with inflation still sticky at an above-target rate and fiscal policy potentially ramping up as a support after the federal budget in early November,” Xu said.

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