BOC: September CPI Not Major Obstacle To October Cut (1/2)

Stronger-than-expected readings across September headline and core CPI metrics has seen expectations of future BOC cuts diminish slightly, with current meeting dated OIS-implied pricing pointing to about 5bp less easing through the next 4 decisions to March 2026.

• That includes just under a 70% probability of a cut at the upcoming October meeting, which fell as far as 62% post-CPI, vs closer to 80% prior to the release. Current BOC meeting-dated OIS implied cumulative rates: Oct -17bp, Dec -25bp, Jan -29bp, Mar -31bp. That's still a more dovish path than seen immediately after the September BOC decision, which saw 21bp of cuts priced through year-end, with the next cut only fully priced by around March.
• The CPI report keeps the upcoming decision in the category of not-a-foregone-conclusion but still likely in favor of a cut. As MNI has pointed out, the headline reading was only slightly above-expected (and even then due largely to volatile energy and food prices), with core goods price pressures looking tame, and inflation breadth (particularly in services) continuing to diminish, suggesting no real obstacle to a cut on October 29 vs what was known before.
• Similar reasoning appears to be held by most of the 7 major Canadian institutions tracked by MNI, of which all but one (BMO) continues to see the BOC cutting rates by 25bp next week even after having considered the September CPI report. Several cited the fact that the BOC has been downplaying the importance of its CPI trim/median measures whose unexpected uptick in September appeared to drive a portion of the hawkish reaction; others note the relatively dovish findings from the Bank's quarterly surveys out Monday..
• That having been said, there are potentially rising risks from this data of a more hawkish communication from the BOC at the meeting along with a rate cut.
• Retail sales on Thursday is the final major piece of data before the decision, with August GDP only out on Oct 31.
• In alphabetical order of institution, each of which as noted expects an October cut with BMO being the exception:
• BMO (hold in October): "Suffice it to say this will make the Bank of Canada's decision a bit more interesting next week than previously expected—markets had been all but baking in a rate cut after Governor Macklem's dovish remarks and yesterday's soft Business Outlook Survey. Absolutely full disclosure: We have been on the dovish side of the ledger, calling for the Bank to eventually cut the overnight rate to 2.0% (and possibly lower if trade gets uglier), but were not convinced that October would see another cut. Given today's setback for core, we'll stay there for now. The biggest counterpoint, as noted above, is that some key measures of core are still fully consistent with the Bank's view that underlying inflation is around 2.5%."
• CIBC: "We think that core measures of inflation were just about subdued enough, and the economy is certainly weak enough, to still justify a further 25bp cut from the Bank of Canada next week. However, after that the Bank is likely to move back onto the sidelines, in part due to evidence of some lingering inflationary pressures, but also on the assumptions that economic growth starts to recover and progress is made towards a trade deal that reduces some of the sector specific tariffs currently impacting Canadian trade."