Inflation rose more than economists expected. Does that mean smaller rate cut from the Bank of Canada in December?

Canada’s inflation rate rose to 2% in October, more than expected and raising doubts about whether the Bank of Canada will cut interest rates as much as previously predicted next month.

Statistics Canada reported Tuesday morning that the consumer price index (CPI) rose from 1.6% in September, with the overall figure slightly higher than the 1.9% expected by economists polled in a Bloomberg survey.

Mortgage interest and rent remained the two biggest drivers of overall annual price growth, at 14.7% and 7.3%, respectively, although both continued to decline from previous months.

While fuel prices eased in October, the pace of decline was slower than the previous month, and the two main inflation measures closely watched by the Bank of Canada gained momentum, accelerating to an annual average of 2.55%.

With the headline CPI still firmly in the central bank’s 1% to 3% target range and the economy continuing to slow, it’s unlikely that Bank of Canada policymakers will opt to reverse the rate cut at their final meeting of the year on December 11.

The larger-than-expected rise in inflation, however, doesn’t completely rule out the prospect of a 50 basis point (0.50%) cut next month, although it will likely give Governor Tiff Macklem something to think about as he weighs the need for an unconventional cut (the rate is typically moved at 0.25%).

The Royal Bank of Canada (RBC) said in a note that Canadian inflation is “likely to continue to drift lower,” with no indication it will jump much above 2%. That means RBC is still forecasting a bigger cut next month.

“Given the weak momentum in the Canadian economy, we continue to expect the Bank of Canada to cut the overnight rate by a further 50 basis points (0.50%) in December,” RBC said