Bank of Canada job harder on inflation numbers

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February’s consumer price index report took economists by surprise as the rate of inflation accelerated on a year-over-year basis to 2.6 per cent in February, outpacing analyst estimates for a 2.2 per cent increase.

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Statistics Canada said the end of the GST/HST holiday in mid-February was the main reason for the pickup in inflation, which jumped from 1.9 per cent in January.

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Here’s what economists think the new data means for the Bank of Canada and interest rates.

‘Upside surprise’: Capital Economics

The “upside surprise makes the Bank of Canada’s job even harder,” Stephen Brown, deputy chief North America economist at Capital Economics Ltd., said in a note.

He said the inflation numbers cast doubt on expectations that policymakers will cut interest rates for an eighth consecutive time at their next policy meeting on April 16.

The CPI outstripped estimates, but, more importantly, the central bank’s preferred measures of core inflation, which remove taxes, also rose last month, Brown said.

CPI-trim and CPI-median increased to an annualized three-month average rate of 3.3 per cent, which is above the top end of the Bank of Canada’s inflation target range of three per cent.

“The upshot is that, despite the downside risks to the economic outlook from U.S. tariffs, we may need to revisit our view that the (Bank of Canada) will cut interest rates again as soon as next month,” Brown said.

Temporary pause: Desjardins

The Bank of Canada warned it had considered holding interest rates when it cut on March 12, despite the threat United States tariffs pose to the economy.

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Royce Mendes, managing director and head of macro strategy at Desjardins Group, said the latest inflation report gives policymakers plenty of reason to “temporarily” pause rate cuts as inflation appears to be on the march again.

He said the number of items in Statistics Canada’s CPI that rose by more than three per cent annually jumped to the highest level since May 2024.

Furthermore, a core measure of services inflation that excludes shelter — an often-cited culprit for runaway inflation — also rose on a three-month annualized basis, to 3.5 per cent from 2.9 per cent in January.

“With price growth likely to accelerate in the months to come as a result of retaliatory tariffs and past currency depreciation, now seems like the right time for the Bank of Canada to take a hawkish detour, driving home the point that containing inflation remains the central bank’s number one job,” Mendes said in a note.

‘Difficult place’: TD Bank

Tuesday’s inflation report “puts the (Bank of Canada) in a difficult place,” Leslie Preston, managing director and senior economist at Toronto-Dominion Bank, said in a note, citing the increase in the headline inflation number as well as the rising trend in core inflation.

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The dynamics are in place for that trend to continue, given that Canadians’ expectations for inflation have risen, even as “the hit to demand from uncertainty and the tariffs themselves” weighs on consumption, despite a “highly uncertain” tariff landscape,” she said.

TD is forecasting elevated tariffs over the next six months, after which they will be gradually reduced.

“In this world, we expect the Bank of Canada to provide some further cushion in the form of two more 25-basis-point rate cuts at its next two rate announcements,” Preston said.

Markets have now “slightly” cut the odds of another interest rate cut on April 16, “but we will know a lot more about the path of tariffs by the time the decision rolls around,” she said.

Rates on hold: Oxford Economics

Headline inflation rose above two per cent for the first time since July 2024, economists Tony Stillo and Michael Davenport at Oxford Economics Group Ltd. said in a note, adding that while the GST/HST tax break muddied the CPI picture, “there are signs that price growth has picked up.”

A measure of CPI that controls for the GST/HST holiday jumped to 2.7 per cent year over year in March, and the three-month measure of core inflation minus food and energy has been climbing despite the temporary tax break, they said.

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Stillo and Davenport highlighted various moving parts in the inflation outlook, including an end to the consumer carbon tax on April 1. They estimate that will lower CPI by 0.5 per cent in April. March will also be the first full month post the GST/HST break, but inflation will also factor in retaliatory tariffs currently worth roughly $60 billion.

“Still, with headline CPI inflation now back above two per cent year over year and a U.S.-Canada trade war well underway, we expect the Bank of Canada will hold rates steady as it guards against upside risks to inflation from tariffs, supply chain issues, and rising inflation expectations,” they said.

• Email: gmvsuhanic@postmedia.com

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