Cooling inflation keeps Bank of Canada on track for a rate hold despite ongoing shelter pressures

Expectations of a December rate hold firmed further this morning, even as October inflation cooled less than economists had expected. Statistics Canada reported that headline CPI eased to 2.2% year-over-year, a touch above the 2.1% consensus and down from 2.4% in September.

The Bank of Canada’s preferred core measures also edged lower, with CPI-trim dipping 0.2 percentage points and CPI-median slipping 0.1 point.

BMO chief economist Douglas Porter cautions that the softer headline figure doesn’t tell the full story. “On the surface, this looks to be a mildly friendly report with headline and median inflation rates dipping,” he wrote, noting that much of the relief, particularly from gasoline and food, was already expected. “However, the new news here is not great, driven by persistent strength in insurance costs and a snap higher in cell charges.”

Porter added that most underlying inflation metrics remain stuck “a bit above” the Bank’s comfort zone of roughly 2.5%. “In other words, this report is just another reason to believe the Bank is moving to the sidelines in December,” he wrote.

Scotiabank’s Derek Holt was even more blunt, arguing that the details of today’s report “don’t matter” for policy at this stage. “They’ve [the Bank of Canada] made it clear that they are sidelined at least for the next several meetings,” he wrote.

CIBC’s Andrew Grantham echoed that view, adding that the outlook extends well beyond December. “We continue to forecast no change in the overnight rate through to the end of next year,” he noted.

Markets appeared to take the data in stride, with the 5-year Government of Canada bond yield practically unchanged throughout the morning from its open of 2.75%.

12-month change in the Consumer Price Index (CPI)
and CPI excluding gasoline

A mixed bag of data

Despite the easing in headline and core measures, driven by easing grocery and gas prices, several components continued to show stubborn strength, as noted above.

Homeowners’ home and mortgage insurance was up 6.8% year-over-year, rent inflation accelerated to 5.2% from 4.8%, and property taxes—priced annually each October—rose 5.6%. Passenger vehicle insurance premiums also climbed 7.3%, and cellular service prices posted their first annual increase in more than two years.

TD economist Andrew Hencic said the underlying inflation picture was similarly uneven. While the Bank of Canada’s preferred core gauges—CPI-trim and CPI-median—cooled in October, several of the older exclusion-based measures moved higher. He noted that on a three-month annualized basis, the same split held: “some heating up and others cooling off.”

Hencic added that the broader policy implications remain largely unchanged. “This month’s report doesn’t change the story much,” he wrote, arguing that inflation is unlikely to fall below the lower end of the target band given ongoing supply-side disruptions, but is also “unlikely to sharply accelerate” amid weak domestic demand. Markets reflect that view as well, with odds of another cut by April holding near 30%.

What will it take to move the BoC off the sidelines?

With inflation largely matching expectations but several components still running hot, economists say the bar for additional easing has only risen. CIBC’s Andrew Grantham noted that October’s deceleration wasn’t enough to shift the outlook.

“It would take a longer period of easing price pressures, combined with indications of economic growth deteriorating again, to bring the Bank of Canada back off the sidelines,” he wrote.

Desjardins’ Randall Bartlett shared a similar view, pointing out that many inflation indicators remain in the upper half of the Bank’s 1% to 3% operating range. “With a broad group of inflation measures remaining elevated and the economy still expected to just escape falling into recession in Q3 2025, there is little pressure on the BoC to continue cutting rates at this time,” he wrote. “We maintain our view that the Bank of Canada will be on hold for the next year.”

Those assessments echo the outlook shared by most major banks featured in a recent CMT article on big-bank forecasts for the Bank of Canada’s policy rate.

The consensus is that the easing cycle has likely run its course, with the overnight rate expected to hold at its current 2.25% through to the end of 2026. Scotiabank is the notable outlier, projecting that the Bank’s next move will be a rate increase in the second half of 2026.

Source: Canadian Mortgage Trends