A sudden increase in inflation could prompt the Bank of Canada to reconsider further interest rate cuts, economists suggest. The country’s inflation rate jumped unexpectedly to 2.6% in February, as reported by Statistics Canada, following the end of the federal government’s temporary tax break mid-month.
This increase marks a significant rise from January’s 1.9% inflation rate, which was largely influenced by the GST and HST exemptions on various household essentials, gifts, and restaurant bills throughout the month. The February inflation figure also surpassed expectations, with economists having anticipated a 2.2% rise.
RSM Canada economist Tu Nguyen acknowledged the expected uptick due to the expiration of the tax break but noted that the 2.6% rate was notably higher than expected, marking a shift from the more stable inflation seen recently.
The rise in inflation was primarily driven by higher restaurant meal prices, along with increased costs for other exempt categories, such as alcoholic beverages and children’s clothing. Without the tax relief, inflation would have reached 3% in February, according to StatCan.
While gas prices saw a modest increase of 0.6% from January to February, overall inflation was tempered by a deceleration in fuel costs on an annual basis. However, Canadians were hit harder by rising travel tour prices, which soared by 18.8% due to increased travel to the U.S. during the long weekend in February.
Looking ahead, economists predict that the removal of Ottawa’s consumer carbon price in April will reduce inflationary pressures. However, the ongoing trade dispute with the U.S. and potential tariffs set for April 2 may counterbalance these effects, with higher prices expected first in grocery stores, particularly for perishable items imported from the U.S.
Benjamin Reitzes, BMO’s managing director of Canadian rates, noted that March’s inflation data will likely show another increase as the tax holiday has fully expired. He cautioned that ongoing inflationary pressures complicate the Bank of Canada’s policy decisions.
In response to recent economic challenges, the Bank of Canada cut its key interest rate by a quarter point to 2.75% last Wednesday, with its next decision scheduled for April 16. Governor Tiff Macklem emphasized that the central bank would focus on how inflation reacts to pressures from the ongoing trade conflict.
TD Bank economist Leslie Preston indicated that core inflation remained higher than anticipated in February, and while a series of rate cuts could be expected, the central bank might opt for a more cautious approach.
Financial markets now suggest there is a 62% chance that the Bank of Canada will hold its rate steady in April, following the unexpected surge in inflation. Nguyen added that concerns over inflationary pressures could lead the Bank to pause further rate cuts if conditions remain uncertain, particularly in light of potential tariff impacts.
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