By Ismail Shakil and Steve Scherer
OTTAWA Canada's annual inflation rate unexpectedly slowed to 3.8% in September and underlying core measures also eased, data showed on Tuesday, prompting markets and analysts to trim bets for another interest rate hike next week.
Analysts polled by Reuters had forecast inflation to hold steady at the 4.0% rate recorded in August. Month-over-month, the consumer price index was down 0.1%, Statistics Canada said, compared with a forecast for a 0.1% gain.
"It's pretty clear that (the central bank) won't be raising rates," said Jules Boudreau, senior economist at Mackenzie Investments. At the Oct 25 policy announcement, the Bank of Canada "will just say: We're not hiking this one. We'll see in December."
Two of the Bank of Canada's three core measures of underlying inflation also decreased. CPI-median edged down to 3.8% from 4.1% in August, while CPI-trim decreased to 3.7% from 3.9%.
Money markets trimmed bets for a rate hike next week after the data. They now see a 23% chance for a rate increase next week, down from 43% before the figures.
The Canadian dollar weakened as much as 0.7%, hitting its weakest since Oct. 6 at 1.3702 per U.S. dollar, or 72.98 U.S. cents.
The deceleration in September was broad-based, stemming from lower prices for some travel-related services, durable goods and groceries, Statscan said. A factor driving prices was a 7.5% year-over-year increase in gasoline prices.
Grocery prices cooled for the third straight month, rising at 5.8% - the slowest pace since December 2021. Excluding food and energy, prices rose 3.2% compared with a 3.6% rise in August.
"The inflation risk is skewed higher on a trend basis, but for now the Bank of Canada can be opportunistic and skip next week's meeting," said Derek Holt, vice president of capital markets at Scotiabank.
Headline inflation had outpaced expectations in the previous two months, stoking fears that the Bank of Canada's 10 rate hikes in 18 months might not have been enough to cool prices. At 3.8%, inflation is still nearly double the bank's 2% target.
The central bank has hiked to a 22-year high of 5%, but it does not see inflation slowing to its 2% target until mid-2025. The bank will issue new forecasts alongside its rate announcement next week.
Bank of Canada Governor Tiff Macklem said last week that the bank would be weighing whether to let previous rate hikes work through the economy or raise again to counter sticky inflation.
(Reporting by Ismail Shakil and Steve Scherer in Ottawa, additional reporting by Fergal Smith and Divya Rajagopal in Toronto; Editing by Dale Smith and Jonathan Oatis)