OTTAWA: The Bank of Canada’s No. 2 official says policymakers want to see more progress on core inflation, even with yearly headline price pressures back to target.

Senior deputy governor Carolyn Rogers, speaking at a Bloomberg New Voices event in Toronto, said that while cooling price pressures are “welcome news” for the central bank and Canadians, it’s not yet time to declare victory.

“There’s still work to do,” she said. “We’ve got to stick to the landing.”

On Tuesday, Statistics Canada reported that the yearly pace of inflation decelerated to the central bank’s 2% target in August, the slowest rate since early 2021.

The central bank’s two preferred core inflation measures eased, averaging a 2.35% yearly pace from 2.55% a month earlier.

Rogers said policymakers want to see underlying price pressures slow further, adding that the central bank wants a “sustainable” return of headline inflation to target, and that it expects bumpiness along the way.

She also noted that there’s a slew of economic data to come before the bank next sets interest rates on Oct 23.

The return to more normal inflation levels is a win for policymakers after one of the most aggressive interest hike cycles in Bank of Canada history.

Starting in March 2022, the central bank raised the benchmark overnight rate from 0.25% to 5% in less than 18 months to tame the highest price pressures in four decades.

So far, it’s worked, with help from slower global growth, repaired supply chains and moderating energy prices.

Canada’s inflation rate has fallen 6.1 percentage points since price pressures peaked at an 8.1% yearly pace in June 2022. That’s the fastest deceleration since the 1980s.

Now, the central bank is increasingly concerned about undershooting the 2% target and risking a deeper economic slowdown, which has led to more of a focus on rising unemployment and a desire for more growth.

“It’s not an absolute tilt to the downside risks, but definitely we’re in a period where the risks are more balanced,” Rogers said.

Officials have already lowered rates three times since June, bringing the benchmark overnight rate to 4.25%, and they’ve signalled more cuts to come.

Economists see mounting weakness in the labour market, and some of them are calling on policymakers to start making bigger moves to bring down borrowing costs.

Earlier this month, governor Tiff Macklem repeated that officials may cut rates by 50 basis points or more if inflation and the economy slowed faster than expected.

But he also said they could decide to pause cuts if growth is stronger or inflation is persistent.

Traders in overnight swaps have also upped their bets for a larger-than-normal reduction at the central bank meeting this month. Swaps markets put the odds of a 50-basis point cut at over 50%.

The magnitude of rate cuts is less important than how the next phase of the economic cycle plays out, Frances Donald, Royal Bank of Canada’s new chief economist, said in a separate interview.

“We are getting relief pressure and by 2025 we should start to see that support coming through the system,” she said, noting that the United States is also at a “tipping point”.

In its July monetary policy report, the Bank of Canada forecast inflation to slow to a 2.3% yearly pace in the third quarter.

Policymakers have warned that so-called base effects - the impact of price changes that happened a year earlier - are likely to push inflation higher at the end of 2024.

Rogers, the first non-economist to hold the senior deputy governor position in the modern era, joined the bank in December 2021, when the overnight lending rate was at 0.25%.

She previously had a long career in financial regulation, including as the secretary general of the Basel Committee on Banking Supervision.

 - Bloomberg