BoC could hit pause on rate cuts as inflation jumps

Canada’s inflation rate increased in January, jumping to 1.9% despite the national GST holiday and strengthening the case for the Bank of Canada to hold off on a March rate cut.

Statistics Canada said on Tuesday that energy prices were the main factor behind that spike, rising 5.3% year over year with the cost of gasoline increasing by 8.6%. Shelter costs, meanwhile, were up 4.5%.

Still, food prices posted their first yearly drop since May 2017, slipping by 0.6%, while prices for alcoholic beverages purchased in stores fell 3.6% because of the tax holiday, which ended on Saturday (February 15).

The overall inflation rate remains below the Bank of Canada’s 2% target – but without the federal GST break, CPI rose 2.7% in January.

Last month’s “middle-of-the-road” reading probably marks unwelcome news for the central bank, according to Royal Bank of Canada (RBC) senior economist Claire Fan, who wrote that Bank decisionmakers will likely hit pause on interest rate cuts when they meet again in March.

The central bank “will want to wait for more data for hints on how underlying price pressures are evolving excluding impact form the tax holiday,” Fan said.

Bank of Montreal (BMO) chief economist Doug Porter said he expects headline inflation to rise “quickly” in the months ahead with the GST break removed, and said a March cut remains unlikely – but still possible if US president Donald Trump moves ahead with his threatened tariffs on Canadian imports.

Unsurprisingly, mortgage interest costs remain a significant contributor to the overall CPI, although Fan noted their impact is steadily declining as the Bank’s earlier rate cuts begin to factor into the inflation reading.

While RBC expects the central bank to stop cutting rates next month, Fan said a sluggish economic outlook and gloomy labour market were likely to put downward pressure on inflation later in the year and push the central bank towards further reductions before the end of 2025.

Canadian Imperial Bank of Commerce (CIBC) economist Andrew Grantham, meanwhile, said the bank continues to forecast a low of 2.25% for the central bank’s overnight rate – “but the path there will depend on how/if tariff uncertainty is resolved as well as upcoming GDP and employment data.”

Source CMP
By Fergal McAlinden