The Consumer Price Index came in weaker than expected for November, clearing the way for further cuts to interest rates by the Bank of Canada.

“The case for another aggressive Bank of Canada rate cut couldn’t get much better,” says CIBC World Markets. “Not only has the Canadian economy largely failed to recover from a devastating September, but consumer price inflation has turned very benign, very fast.”

Headline CPI plunged for the second straight month in November, down 0.9%. This is considerably weaker than consensus expectations, CIBC notes, and it represents the largest monthly decline in more than 40 years. Consumer prices are now up just 0.7% in the past 12 months.

Falling energy pries are responsible for much of the fall. But CIBC notes, “Consistent with a domestic recession that has yet to run its course, the benign inflation news extended beyond energy. The Bank’s measure of core inflation was much softer than expected, falling an unadjusted 0.3%.” On an annual basis, core inflation is now in the bottom half of the Bank’s inflation target band.

“It was no surprise that a drop in gasoline prices pulled Canadian consumer prices lower in November. However, the extent and broad-based nature of the price decline last month was absolutely jaw-dropping,” marvels BMO Nesbitt Burns.

TD Bank joins the chorus of shocked economists, noting, “What was gearing up to be another run-of-the-mill consumer price report this morning, instead came in as a big shocker. And today’s dip in the core rate of inflation is unlikely to be the last. With the Canadian economy struggling and excess capacity rapidly building, it would not take much for the year-over-year rate of core inflation to break through the floor of the Bank of Canada’s 1%-3% target band by the middle of 2002.”

Bank of Montreal says that the report weighs in favour of more monetary easing. “Given expectations that Canada’s economy likely contracted for the second consecutive quarter in the final three months of the year, and given the somewhat uncertain outlook for 2002, the Bank of Canada is expected to take out more recession insurance. With prices so well behaved, the cost of adding to its insurance policy — in that excess liquidity raises inflation risks — is very low.” It calls for a 25 basis point rate cut at the January 15 fixed announcement date.

BMO Nesbitt says, “Canadian inflation pressures are melting faster than an ice cube in hot cider. Gasoline prices have been only the most visible sign of a more general retreat in price trends. The much lower-than-expected CPI gives the Bank of Canada the option to cut 50 bps on January 15.”

CIBC agrees, concluding, “The surprisingly large improvement in the core saw markets move to price in a more aggressive Bank of Canada stance on January 15. With underlying inflation — the Bank’s key policy guide — now residing below its own target and Q4 growth off to a rough start, it’s getting easier and easier for the Bank to defend a 50 bp rate cut at the next rate date.”