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Markets are now fully pricing in another 75-bps rate hike by the Bank of Canada next week following the release of September’s inflation data on Wednesday.

The headline Consumer Price Index (CPI) came in stronger than expected, decelerating just slightly to an annual growth rate of 6.9% in September, just a tick down from 7% in August.

Meanwhile, the average of the Bank of Canada’s three preferred measures of core inflation, which strips out more volatile items, came in at 5.3%, matching an upwardly revised reading for July.

As a result, markets are now fully pricing in a 75-bps rate hike by the Bank of Canada when it meets on October 26.

Breakdown of the September inflation data

Food prices, which were up 11.4%, were largely responsible for September’s higher-than-expected inflation reading. It was the fastest rate of increase since 1981.

Prices for durable goods were also up in the month (+6.7% vs. 6% in August) due to a rise in vehicle prices (+8.4%), which Statistics Canada said was “partially attributable to the ongoing shortage of semi-conductor chips.”

The Mortgage Interest Cost Index also contributed upward pressure to the headline reading, “as Canadians renewed or initiated mortgages at higher interest rates,” Statistics Canada noted. The mortgage interest cost basket was up 8.3% in September, up from 4.8% the previous month and 1.7% in July.

Source: Statistics Canada

Meanwhile, homeowners’ replacement cost, which is related to the cost of new homes, continued to decelerate, with a reading of 7.7% vs. 8.4% in August. The “other owned accommodation expenses” basket, which includes real estate commissions, fell to a rate of 5.8% from 7.4% in August.

Macklem “has no choice” but to hike 75 bps: Scotiabank

BMO and Scotiabank both hiked their forecasts and now expect the Bank of Canada to deliver its second consecutive 75-bps rate hike next week. That would lift the overnight target rate to 4%—a level not seen since 2008—and imply a prime rate of 6.2%

“Bluntly, inflation did not ease as much as anticipated last month, even as gasoline costs took a big step back. Underlying inflation remains extremely persistent and sticky at above 5%,” wrote BMO chief economist Douglas Porter.

“Combined with the BOC’s recent tough rhetoric, the recent weakness in the Canadian dollar, and the strong likelihood that the Fed hikes by 75-bps at the next FOMC, we are now expecting a like-sized 75-bps hike next week from the Bank,” he added.

Scotiabank economist Derek Holt, meanwhile, had been forecasting a 75-bps rate hike even before the inflation data came out on Wednesday.

Among just one of his reasons, Holt said, that if the Bank went with a 50-bps hike, following its previous 75-bps increase and 100-bps hike before that, would “risk an RBA-style downshifting reaction in markets that eases financial conditions, which seems counter to what they wish to happen.”

“If the BoC hikes 75-bps next week, then they probably have a terminal rate in mind that is in the ballpark of what the FOMC has guided for theirs (4.5-5%),” Holt wrote. “It’s hard to imagine that after a 75-bps hike, they either stop or downshift to just a 25 bps and then, perhaps, done.”

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