Some economists expect bigger interest-rate cuts after core inflation rate hit the Bank of Canada’s long-sought 2% target in August.

The central bank has introduced three consecutive 25-basis-point cuts this summer following a prolonged series of holds and hikes. Economic conditions now warrant bigger cuts to the overnight lending rate, say the economists.

“Bull’s-eye! Headline inflation is back at the Bank of Canada’s 2.0% target,” wrote James Orlando, a senior Toronto-Dominion Bank economist, in a research note provided to Connect.

“At the same time, core measures keep grinding lower. These figures would be even lower if it weren’t for the outsized impact of high housing costs.”

Inflation, excluding shelter, is increasing at a “paltry” 0.5% year-over-year, he noted.

“This exemplifies how still high interest rates have weighed on the Canadian economy and slowed the pace of growth,” wrote Orlando in a research note provided to Connect.

“Inflation continues to validate the need for the Bank of Canada to continue cutting its policy rate. We calculate that the current policy rate is still nearly 200 basis points above where it should be based on the current state of the economy. And that is after 75 bps in cuts over the last few months. No wonder odds of larger 50 basis point cuts are growing in futures markets. Over the next few weeks, we will be getting a number of BoC members speaking on the economy. This will provide the central bank plenty of opportunity to move market pricing towards its intended path.”

The Globe and Mail published excerpts of notes from a number of economists who anticipate that the BoC will start making deeper rate cuts.

“Both headline and core inflation are now on track to average 0.1% less than the Bank [of Canada] anticipated this quarter,” wrote Stephen Brown, deputy chief economist for Capital Economics. That alone will not be enough to persuade the bank to cut by 50 bps at its next meeting, but it would leave the door open to a larger move if the bank becomes more concerned about the downside risks to the economic outlook.”

Benjamin Reitzes of BMO Capital Markets, said next week’s GDP figures “loom large” in the debate over a 25-bps or 50-bps cut. And, the latest inflation figure “tilts toward a more aggressive path.”

If the BoC’s next inflation report shows another surprising reduction, calls for a 50-bps cut will “only grow louder,” he added.

But some economists anticipate that the BoC will still cut incrementally, the excerpts published in the Globe show.

“While the return to 2% inflation raises the odds of a larger sized cut, the Bank of Canada is likely to continue with the slow and gradual approach of a 25-basis-point rate cut in October, with a possibility of another 25-basis-point cut in December,” wrote Tu Nguyen of tax and consultancy firm RSM Canada.

“Two 25-basis-point cuts will be favoured over a single 50-basis-point cut, because a larger cut could cause prospective buyers to rush into the housing market and home prices to shoot up.”

BoC Governor Tiff Macklem has adopted a softer stance on rate cuts this year. However, he has still stressed the need to proceed cautiously with them.

Some economists and analysts have predicted that the BoC will become more confident about rate cuts because the U.S. Federal Reserve has finally signalled that it will introduce cuts after other countries moved faster. U.S. monetary easing would reduce the risk of a wide divergence between BoC and Fed interest-rate policies, preventing a larger Canadian-American currency differential.

The Fed is widely anticipated to announce a cut Wednesday as U.S. economists debate whether it will be a 25-bps or 50-bps reduction.

“The market is still only placing a 50% probability on a non-standard [BoC] reduction in October, but there’s no reason to wait for December after seeing these [inflation] numbers,” wrote Royce Mendes, managing director and head of macro strategy at Desjardins.

“We expect market [debt] pricing to move further in the coming days after the Fed is out of the way.”

Pictured: Bank of Canada Governor Tiff Macklem