All eyes are on the Bank of Canada as it prepares for its next interest rate announcement on October 23.

Following the latest inflation report, investors are increasingly anticipating a half-point rate cut, along with an additional 25 basis points of easing by year-end. If this unfolds, the Bank of Canada’s policy rate could reach 3.5% by December, with further cuts likely in 2025.

This easing cycle will be welcomed by holders of variable-rate mortgages and those currently priced out of homeownership, provided home prices don’t rise as borrowing costs decrease.

For the past three years, the Bank of Canada has primarily focused on curbing inflation. With price pressures largely under control, policymakers are now concerned about inflation dropping too low and falling below the central bank’s 2% target.

The unexpectedly slow inflation reading for September likely heightens these concerns and supports the case for a larger half-point rate cut on October 23. Financial markets now estimate the odds of this occurring at around 70%, up from 50% prior to the latest inflation data.

Since June, the Bank of Canada has cut interest rates by a quarter-point three times in a row. However, at 4.25%, the benchmark policy rate remains at least a percentage point above what economists consider a neutral level.

Let’s unpack the 4 Major Indices that influences the Bank of Canada’s Monetary Policy Announcement

1. Inflation Numbers
   With inflation returning to the Bank of Canada’s 2% target in August, the labor market has gained greater significance. As inflation and wage expectations stabilize, the Bank of Canada can confidently shift its focus to reducing policy restrictiveness.
   Impact on Rate Reductions: Very Positive
2. Job Market
   Robust employment figures for September have dampened expectations for a rate cut by the Bank of Canada later this month. The country added a net 42,000 new jobs in September, including 112,000 full-time positions, alongside a decline in the unemployment rate.
   Impact on Rate Reduction: Positive
3. Wage Growth
   In September, Canada’s unemployment rate edged down to 6.5% as the economy added a net 47,000 jobs, driven by a substantial gain of 112,000 full-time positions, although this was partially offset by a loss of 61,000 part-time jobs. Despite the overall job growth, the labor force participation rate fell by 0.2 points to 64.9%, marking its third decline in four months. This indicates that some individuals are withdrawing from the job market even as employment figures improve. While job growth surpassed expectations, the drop in participation and a 0.4% decrease in total hours worked highlight ongoing challenges in the job market. Additionally, average hourly wage growth slowed to 4.6% from 5% the previous month, suggesting a slight deceleration in wage increases.
   Impact on Rate Reduction: Positive
4. Economic Growth
   Canadian economic growth slowed to 1.2% in the third quarter of the year. GDP is projected to continue growing at a modest pace in Q4, at 1.4%, as the economy encounters ongoing challenges. The Q3 estimate for the total Consumer Price Index (CPI) inflation fell to 2.1% year-over-year, and forecasts suggest it may decrease further to 2.0% in the final quarter of the year.
   Impact on Rate Reduction: Neutral

Prediction: 0.5% Rate Drop