The chances of a half-percentage-point interest rate cut by the Bank of Canada became more likely Tuesday after Statistics Canada reported annual inflation fell to 1.6 percent in September .

Economist Tu Nguyen of accounting and consulting firm RSM Canada said she expected the inflation rate to remain close to the central bank’s 2% target, where it was in August, for a few more months.

“This is one of the cases where I’m happy to be wrong,” she said.

Nguyen said that while the Bank of Canada favored a slow, gradual pace of cuts of 25 basis points each time, the inflation report increases the chances of a 50 basis point cut.

“It’s clear that we are well behind the times when it comes to lowering rates,” she said.

The inflation report is the last major economic data before the Bank of Canada’s interest rate decision on Oct. 23, when it will also update its economic forecast in its monetary policy report.

It also follows stronger-than-expected employment figures for September, which revealed the economy created 47,000 jobs as the unemployment rate fell to 6.5 per cent.

However, Nguyen said employment data has fluctuated a lot from month to month and “it appears that the September jobs report is the exception rather than the rule.”

Statistics Canada said Tuesday that falling gas prices were the main cause of the drop in the overall inflation rate in September, as drivers paid less to fill up their tanks than last year.

Gasoline prices in September fell 10.7 percent from a year earlier. Excluding gasoline, the annual pace of inflation was 2.2 percent in September.

Claire Fan, an economist at the Royal Bank of Canada, pointed out that housing costs continue to rise at a faster rate than the rest of the consumer basket.

“But the extent of price pressure outside of housing has now more fully normalized to what it was before the pandemic,” Fan wrote in a report.

Rent prices increased at a slower pace during the month, but remained elevated as they rose 8.2 percent from last year, following a year-over-year increase by 8.9 percent in August.

Mortgage interest costs in September rose 16.7 percent, compared to a year-over-year gain of 18.8 percent a month earlier.

Statistics Canada reported that prices of food purchased in stores rose faster than overall inflation, to 2.4 per cent in September, the same rate as August. Prices for fresh or frozen beef increased by 9.2 percent, while edible fats and oils increased by 7.8 percent and eggs by 5 percent.

Prices for food purchased from restaurants increased 3.5 percent, compared to 3.4 percent in August.

The Bank of Canada has cut its key interest rate three times this year to 4.25 percent.

Governor Tiff Macklem said it was reasonable to expect further interest rate cuts, given progress on inflation, but the pace and timing of reductions will depend on the assessment of economic data by the central bank.

In September, Macklem indicated his willingness to change the pace of budget cuts, if circumstances warrant.

This report by The Canadian Press was first published October 15, 2024.