Bank of Canada expected to cut interest rates after last-minute inflation report

68c1bc368d4c8a6c6490c23ajpeg.jpg The Canadian Press

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OTTAWA — The Bank of Canada will have to grapple with a last-minute inflation report, a shift in Ottawa’s tariff stance and lingering uncertainty about government spending plans heading into its interest rate decision on Wednesday.

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Financial markets are overwhelmingly expecting the central bank to break a string of three consecutive holds and cut its policy rate by a quarter point to 2.5 per cent, according to LSEG Data & Analytics.

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Before the Bank of Canada announces its monetary policy decision, governing council will get a look at August inflation data from Statistics Canada on Tuesday.

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Economist expectations for the consumer price index is for the annual rate to rise to two per cent, from 1.7 per cent in July, market data shows.

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Tony Stillo, director of Canada economics at Oxford Economics, said that matches his own forecast for two per cent inflation for August, as prices for energy and food last month accelerated.

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Stillo said he expects Canada’s counter-tariffs on grocery items such as Florida orange juice contributed to sticky food inflation last month.

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August’s inflation figures won’t reflect Canada’s move to waive the majority of those retaliatory tariffs at the start of September.

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Stillo said that decision, combined with Canada’s economy contracting in the second quarter, will take some steam out of prices.

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Canada is “teetering on a recession,” Stillo argued.

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Whether GDP declines again in the third quarter or not, he said the economy will struggle to eke out growth in the second half of the year as uncertainty around the trade war persists.

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While Oxford Economics previously thought the Bank of Canada was done cutting rates, Stillo said the firm has adapted its forecast.

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“The equation has changed now that Canada has reduced and eliminated most of its retaliatory tariffs,” he said.

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“In the context of a weak economy, I think the bank is going to take an insurance policy out and do a quarter-point cut in September and we think it’ll be followed up by another quarter-point cut in October.”

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Stillo said that would bring the policy rate to 2.25 per cent, the bottom of the Bank of Canada’s so-called neutral range, where monetary policy is neither too stimulative nor too restrictive for growth.

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A Sept. 12 report from TD Economics said the central bank has reason to lower rates as trade uncertainty and a weakening jobs market work to cool residual inflation pressures.

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“However, an upside surprise to inflation readings may keep the BoC to the sidelines,” the report said.

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“Overall, recent data flows have more or less tracked the bank’s forecast scenario consistent with a rising need for a further reduction in the policy rate.”