Canada’s annual inflation rate dropped to 1.6% in September, driven primarily by lower gas prices, Statistics Canada reported on Tuesday.

The key question now is whether this will prompt the Bank of Canada to accelerate its pace of interest rate cuts.

Economists surveyed by Bloomberg had anticipated inflation to fall to 1.9%, so the lower-than-expected figure raises new speculation ahead of the Bank’s next interest rate announcement on October 23.

The Bank of Canada is expected to lower its key overnight lending rate again, with growing speculation that the cut could be 50 basis points (half a percentage point), instead of the recent 25-point reductions.

BMO’s chief economist, Douglas Porter, acknowledged this sentiment in a research note, suggesting the Bank may be tempted to make a larger cut. Porter noted that the overnight interest swap market is already pricing in the possibility of 75 basis points in rate cuts by the end of the year.

“The economy is underperforming, confidence is low, and the Bank appears to be leaning dovish. If the market is offering the Bank a chance to cut by 50 bps, it’s hard to see them turning it down,” Porter said.

The Bank of Canada has already reduced its key overnight lending rate by 25 basis points in each of its last three meetings.

Previously, the Bank raised interest rates 10 times between March 2022 and mid-2023 to curb inflation, which peaked at 8.1% in June 2022 after the economy reopened from COVID-19 restrictions.

By raising borrowing costs, the Bank sought to reduce consumer and business spending, slow down the economy, and bring prices under control. Now, as the economy slows and inflation trends downward, the Bank is shifting its focus to stimulate growth through rate cuts.