Bank of Canada rate hikes may end amid declining inflation

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The Bank of Canada’s series of interest rate hikes, initiated to combat inflation, may be reaching its end as recent data shows a drop in inflation to 3.8% in September, below the anticipated 4%, according to Statistics Canada. Economists have suggested that this decline could signal the end of the central bank’s rate hiking cycle, despite Canadians grappling with the lag effects from multiple interest rate hikes. These hikes have significantly affected banking and housing costs, with the central bank raising its benchmark interest rate from 0.25% in March 2022 to 5%.

Analysts from Rosenberg Research highlighted the financial pressures Canadians are facing due to these measures. The next decision on interest rates is due on October 25. Economists from CIBC Capital Markets have proposed that if inflation continues to fall, given the stalling economic activity in Q2 and Q3 of this year, it could potentially halt the rate hiking cycle.

Despite September’s deceleration in inflation, CIBC economists cautioned that this does not counterbalance previous higher-than-expected readings. A potential recession was also warned by CIBC if rates continue to increase. They anticipate a pause on rate hikes following the recent data.

Contributing to this discourse, RSM Canada analysts concurred, suggesting that expected weaker growth by year-end will likely prevent further rate hikes. They noted that softening consumer demand is leaving less room for businesses to raise prices, a trend expected to continue even though inflation is predicted to remain above 3%.

The Bank of Canada’s last report projected a 3.3% inflation rate, lower than the actual Q3 annual inflation rate of 3.7%. Short-term headline inflation fluctuations may be caused by energy and gasoline prices but won’t change the Bank of Canada’s discourse. Despite falling price growth, Canadians are cautioned about other financial pressures.

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