• Core price measures ease to 40-month lows in August
• Consumer prices fall on a monthly basis
• Cost of rent rises 8.9% from 8.5% in July

OTTAWA, Sept 17 (Reuters) - Canada's annual inflation rate reached the central bank's 2% target in August, data showed on Tuesday, fuelling hopes for a 50-basis-point interest rate cut by the country's central bank next month.

The consumer price index posted its smallest rate of increase since February 2021 and the closely watched core price measures also cooled to their lowest levels in 40 months, Statistics Canada said.

Consumer prices fell 0.2% on a month-on-month basis, it said.

"We expect central bankers to slash their policy rate by 50 basis points next month in an effort to expedite the return to a more neutral setting," Royce Mendes, head of macro strategy at Desjardins Group, wrote in a report.

A neutral setting is when the policy rate is around the so-called neutral rate of interest, which is between 2.25% and 3.25% in Canada, a range where interest rates are neither restricting nor stimulating growth.

Analysts polled by Reuters had forecast the consumer price index (CPI) would cool to 2.1% from 2.5% in July on an annual basis, and expected it to be unchanged on a monthly basis.

At the Bank of Canada's monetary policy decision announcement earlier this month, Governor Tiff Macklem said the central bank had to increasingly guard against the risk that inflation could fall below its target as economic growth was weak.

Economic growth in Canada has been losing steam, with the gross domestic product in the third quarter likely to fall to half of the BoC's forecast. Unemployment has also fallen to a seven-year low barring the pandemic years of 2020 and 2021.

"The gradual rise in the unemployment rate and slowing pace of economic growth ... suggest high interest rates are working to cool the economy. In fact, maybe they're working too well," said Randall Bartlett, senior director of Canadian economics at Desjardins.

"We think the BoC is likely to cut the policy rate by 50 basis points at its October announcement," he added.

The BoC has reduced its key policy rate three times in a row, cutting it by a cumulative 75 basis points to 4.25%.

Money markets are fully pricing in 25-basis-point rate cuts at each of the last two monetary policy meetings of 2024. Expectations of a 50-basis-point cut next month rose to 47.5% from 46% before the data on Tuesday were released.

LOWER GASOLINE PRICES

The easing of price pressures was primarily helped by a drop in the prices of gasoline, telephone services and clothing and footwear, while shelter costs - mortgage and rents - continued to cool at a tepid pace as rents maintained their relentless rise.

The Canadian dollar edged lower to C$1.3589 to the U.S. dollar, or 73.59 U.S. cents.

The BoC had predicted annual inflation to be at 2.6% this year and fall to 2.4% next year before coming down to its mid-point of the target range of 1-3% in 2026.

CPI-median - or the price change located in the middle of the CPI basket - slowed to 2.3% in August from 2.4% in July annually. CPI-trim - which excludes the most and the least volatile price items - cooled to 2.4% from 2.7%.

Gasoline prices, which contributed the most to the fall in inflation, fell by 5.1% and those for clothing and footwear fell by 4.4%.

Shelter costs, which account for close to 30% of the CPI basket, rose 5.2% in August, from 5.7% in July, primarily led by mortgage interest costs and rents.

Mortgage interest costs slowed to 18.8% in August from 21% in July, while rents rose 8.9% from 8.5%. Mortgage interest costs and rent remained the largest contributors to the increase in the CPI in August, Statscan said.

Sign up here.

https://www.reuters.com/world/americas/canadas-inflation-cools-2-aug-reaches-central-banks-target-2024-09-17/