Traders Trim Big Canada Rate Cut Bets After Inflation Uptick

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(Bloomberg) -- Inflation in Canada rose by more than forecast and underlying price pressures reaccelerated, hiccups that may dissuade policymakers from a second straight 50 basis-point cut to interest rates next month.

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The consumer price index rose 2% in October on a yearly basis, up from a 1.6% increase a month earlier, Statistics Canada reported Tuesday in Ottawa. That’s slightly faster than the median estimate of 1.9% in a Bloomberg survey of economists.

The central bank’s two preferred core inflation measures also quickened, averaging a 2.55% yearly pace, faster than expectations and up from 2.35% a month earlier. A three-month moving average of those measures rose to an annualized pace of 2.8%, from 2.1% in September, according to Bloomberg calculations.

After the release, traders in overnight swaps trimmed their bets for a second consecutive large rate cut to about one in three, from a little less than a coin flip previously. The loonie gained as much as 0.3% after the report to trade at C$1.3976 against the greenback, while Canadian government bond yields pared declines.

The first acceleration of headline inflation in five months may bolster a case for the Bank of Canada to reduce borrowing costs gradually, after officials stepped up the pace of easing in October with a half percentage-point cut. The next and this year’s final rate decision is on Dec. 11.

Still, Tuesday’s inflation print didn’t eliminate bets for bigger rate cuts. That’s because the central bank had already expected a bump along the road, with consumer prices hovering around 2%, as policymakers keep cutting rates to boost economic growth.

When Governor Tiff Macklem and his officials delivered their outsize rate cut last month, they said they want to see a pickup in growth and demand. Preliminary industry-based data point to 1% annualized growth in the third quarter, below the central bank’s 1.5% estimate. Final expenditure-based gross domestic product data is due at the end of this month.

On a monthly basis, the consumer price index ticked up 0.4%, versus expectations for a 0.3% gain. It increased 0.3% on a seasonally adjusted basis.

The price increases in October were relatively broad-based, with clothing and footwear as well as transportation among the biggest contributors to the gain.

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