Economists said that the inflation rate in Canada dropped to 3.8 percent last month as price pressures eased across the economy, paving the way for the Bank of Canada to keep its key interest rate steady next week.

The Canadian Statistical Agency released its latest Consumer Price Index report on Tuesday, which showed inflation slowing again in September after rising to four percent in August.

The federal agency reported that grocery prices rose by 5.8 percent year-on-year in September compared to 6.9 percent in August.

The report also showed that the main upward pressures on annual inflation last month were costs of mortgage interest and rent, food purchased from restaurants, gasoline, and electricity. Meanwhile, a decline in the prices of phone services, natural gas, air transportation, child care, housekeeping services, and furniture helped reduce inflation.

Economists reacting to the latest inflation data said it adds more evidence that the Bank of Canada, which is preparing for an interest rate decision on October 25, may remain on the sidelines and wait for inflation to continue to decrease.

The central bank's key interest rate stands at five percent, the highest level since 2001.

Bank of Canada Governor Tiff Macklem recently stated that he expects the board's discussions to focus on whether the central bank should exercise more patience with inflation or act quickly to curb price growth.

Although the recent inflation figures provide some relief for the central bank, Ritzis stated that before the central bank fully retreats, it will need to see sustained decreases in inflation towards the 2 percent target.

The central bank has been battling rampant inflation by raising interest rates since March 2022. While inflation has not yet returned to its target of 2 percent, the central bank is trying not to overdo interest rate hikes, considering that the economy has already started to recover.

Since last year, economic growth has noticeably slowed and the labor market is no longer as hot as it was in the wake of the coronavirus lockdowns.

The latest business outlook survey conducted by the Bank of Canada, published on Monday, also showed that business sentiment continued to weaken in the third quarter as companies stated they expect sales growth to slow over the next year.

As previous interest rate hikes continue to feed through the economy, forecasters expect the weakness to persist. Economists estimate that it may take one to two years for the full impact of the interest rate hike to be felt in the economy.

In addition to its decision on the interest rate, the Bank of Canada will publish its latest economic and inflation forecasts on October 25.