Economists indicate that the Bank of Canada has a compelling rationale to lower its policy rate at the upcoming meeting on Wednesday, following the release of recent inflation data. Statistics Canada revealed that the annual inflation rate unexpectedly decreased to 2.3 percent in March, primarily due to reduced costs for gasoline and travel.
In a statement issued on Tuesday, Canada’s federal data agency noted that the slowdown in inflation was partially influenced by the conclusion of the temporary suspension of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) on February 15, which exerted upward pressure on prices for qualifying products in March compared to February.
Gasoline prices experienced a year-over-year decline of 1.6 percent in March, attributed mainly to falling oil prices amid concerns regarding diminishing global demand and slowing economic growth linked to potential tariffs.
“Canadian inflation experienced a significant decline in March,” stated CIBC economist Katherine Judge in a note to clients on Tuesday. “The reduction in price pressures aligns with our expectation that the Bank of Canada will implement a 25 basis point interest rate cut at tomorrow’s meeting, as the risks to growth from the trade conflict outweigh any inflationary pressures from tariffs.”
Economists had anticipated that the Consumer Price Index (CPI) would rise to 2.7 percent in March, based on consensus estimates from CIBC Capital Markets. CIBC’s economists projected a 2.5 percent figure, while Scotiabank Economics and BMO Economics forecasted an increase to 2.7 percent.
Canada’s annual inflation rate rose to 2.6 percent in February, following a 1.9 percent increase in January.
In addition to declining gas prices, reductions in costs associated with recreation, education, and reading contributed to a decrease in inflation during March. Air transportation costs experienced a 12 percent year-over-year drop, following a 4.4 percent decline in February. Furthermore, cellular service prices decreased by 8.8 percent on an annual basis. Statistics Canada highlighted that industry-wide promotions led to a 6.8 percent reduction in cell phone plan prices from February to March.
Dominique Lapointe, the director of macro strategy at Manulife Investment Management, remarked in an email that although economists anticipated that the conclusion of the 2024 Holidays’ GST rebate and tariffs on U.S. food and alcohol would elevate inflation, widespread disinflationary trends, including the reduction of gasoline prices due to the removal of the carbon tax, seemed to counterbalance these factors.
Lapointe further expressed, “We believe that the morning’s report significantly reassures the Bank of Canada regarding underlying inflation, thereby strengthening our expectation of a rate cut at tomorrow’s meeting. While this is not the consensus among economists, it is noteworthy that market expectations have shifted from a 35 percent to a 45 percent likelihood of a cut following this announcement.”
The odds have fluctuated between favoring a hold and a cut since the previous week, with the agency indicating that the probability of maintaining interest rates was approximately 58 percent as of Friday.
Core inflation measures, CPI-trim and CPI-median, remained high in March with minimal changes. These metrics exclude tax variations and are closely monitored by the Bank of Canada. Monthly inflation increased by 0.3 percent in March, while the seasonally adjusted monthly CPI remained unchanged.
RBC Economics economist Abbey Xu noted in a report on Tuesday that the headline figures indicate diminishing inflation risks ahead of the tariffs, suggesting that the Bank of Canada could consider an insurance cut similar to the one implemented in March.
Canada’s central bank has reduced its policy rate at its last seven meetings, bringing it down to 2.75 percent, the lowest level since September 2022.