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Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.
Canada’s Consumer Price Index retreated surprisingly to 2.3% annually, down from 2.6% in February, undershooting FactSet estimates of 2.7%, as prices of crude oil fell on concerns over weakening global oil demand and slowing economic growth.
According to the latest Statistics Canada report, the index rose 0.3% on a monthly basis, a sharp deceleration from 1.1% increase the previous month. The slowdown in inflation is particularly significant considering it comes during the first full month following the sales tax break that contained prices of a wide variety of goods during its two-month rollout period.
The CPI report is seen as increasing the odds that the Bank of Canada delivering another quarter-point interest rate cut at its next meeting Wednesday. This marks yet another swing in expectations for the central bank’s rate policy. With the outlook for the economy significantly uncertain thanks to US President Donald Trump’s tariffs, many analysts had expected the Bank of Canada to hold off cutting interest rates this week.
Following the release of the report, traders in overnight swaps raised the odds of a rate cut on Wednesday to about 50%, up from just over 33% earlier.
March CPI Dip Driven by Lower Energy and Travel Costs
The downtick in the March inflation reading was led by a contraction in gasoline prices, travel tours, airport transportation, and cellular services, all of which countered the inflationary effects of impact of the end of the two-month of sales tax holiday that ended mid-February.
Core inflation, the Bank of Canada’s preferred inflation gauge, remained relatively unchanged, with CPI-median inflation coming in at 2.9%, the same as previous month, while CPI-trim a tick lower from previous month at 2.8%.
Core inflation measures exclude more volatile elements of the CPI, thus providing a clearer picture of underlying inflation trends.
Here are highlights from analyst commentary on the February CPI report.
Charles St-Arnaud, chief economist at Alberta Central
“The recent trend in CPI’s monthly changes suggests that the momentum in inflationary pressures eased in March but remained elevated. As such, we observe that the 3-month annualized changes of many CPI components remain above 3% (see Fig. 2), with the 3-month annualized change in headline CPI at 3.2%. With the decline in inflation due to volatile and temporary factors (gasoline prices, travel services), and the broadening of inflationary pressures, it is unclear whether inflation will remain subdued in the coming months, especially given the potential upside pressures on prices due to the trade conflict.
“With this in mind, while the weaker inflation increases the likelihood of a cut at tomorrow’s meeting, we think the Bank of Canada is likely to take a pause to better assess the situation, especially in light of broadening inflationary pressures.”
Douglas Porter, chief economist at BMO Economics
“After a couple of months of high-side surprises, Canadian inflation caught a serious March break, held down by much milder travel costs than normal. This speaks to the fact that the inflation impact of the trade war is more of a two-way street for Canada than the US, since Canada’s tariffs are so much lighter so far, while the domestic economy is under more pressure.
“…this would be a big green light for the BoC to cut tomorrow, except the small detail that their major core measures are holding close to 3% (so with the overnight rate having been slashed to 2.75%, real rates are already negative) and policymakers are operating in the dense fog of an ever-shifting trade war.”
Thomas Ryan, North America economist at Capital Economics
“… with the three-month annualized pace of those averaged core measures holding uncomfortably high at 2.7%, and downside risks to the economy easing as trade tensions with the US de-escalate, we expect the Bank [of Canada] to keep interest rates on hold, while it waits to assess the impact of retaliatory tariffs.
“CPI-trim and CPI-median also surprised to the downside, with the average of the two climbing by 0.14% m/m following seven consecutive months of above-target (i.e. above 0.17%) increases. That helped bring the average three-month annualized rate down to 2.7% from 3.0%, but at that level underlying inflation remains too high for the Bank of Canada’s comfort. So, while it is reasonable that markets have slightly increased the odds of a rate cut tomorrow (now at 50%, up from around 40% before the data), we think the Bank will prefer to hold rates steady to reinforce its inflation-fighting stance, as it waits to see how the economy and prices respond to tariffs and counter-tariffs.”
Katherine Judge, executive director and senior economist at CIBC Capital Markets
“We expect the negative demand impact from higher unemployment due to tariffs and the deterioration in sentiment since March to be more worrisome for the Bank of Canada than temporary upward pressure on prices from tariffs ahead, and we continue to look for the overnight rate to reach a trough of 2.25%.
“Following a couple of months of upside surprises to inflation, the Bank of Canada received good news in the March data as prices moderated notably. The easing in price pressures is consistent with the Bank of Canada cutting interest rates by 25 basis points at tomorrow’s meeting, with the downside risks to growth from the trade war outweighing any upside to inflation from tariffs in our view.”
Abbey Xu, economist at Royal Bank of Canada
“Although still higher than the pre-tax holiday figure of 1.9% in November, the headline reading says inflation risks ahead of tariffs were subsiding, and the Bank of Canada can afford to opt for an insurance cut like it did in March.
“Our forecast for the Canadian economy this year has weakened since March. Tariffs are still expected to hurt Canadian exporters, but concerns have also grown around a substantially softer U.S. outlook due to reciprocal tariffs and how that can spill over to impact Canada. Prices are expected to rise as a result, although to a limited extent as importers substitute purchases to less-tariffed regions and with downward pressure from the end of consumer carbon tax in April. We see one more 25-basis-point rate cut from the Bank of Canada after tomorrow, for the overnight rate to lower to a terminal of 2.25% in June.”
Matthieu Arseneau, economist at the National Bank of Canada
“The last few months had been surprising as inflationary pressures rapidly intensified with an economic upturn despite numerous signs of an economy that remained in excess capacity. Indeed, a small proportion of companies continued to claim that they would not be able to meet additional demand or were experiencing labor shortages.
“In this sense, a return to more moderate inflationary pressures is not surprising, especially as several economic indicators began to show weakness, including the labor market in March. Given the tariff uncertainties that are paralyzing several companies and are likely to lead to further weakness, we reiterate that the upsurge in inflation was temporary, especially since the Canadian government does not seem inclined to implement strong retaliatory tariffs. In such a context, the Bank of Canada should be in a position to further deliver interest rate cuts this year (key rate forecast at 2.0% at the end of the year).”
Tu Nguyen, economist at RSM Canada
“The unexpected slowdown in inflation in March tilts the odds ever so slightly toward a rate cut by the Bank of Canada tomorrow as signs of a weakening economy emerge, including lower business and consumer confidence and a decline jobs.
“Looking ahead, unless the U.S. announces tariff exemptions on Canadian cars and auto parts, which would lead the Canadian government to drop retaliatory tariffs, one can expect a moderate increase in prices in the upcoming months.
“Since Canada’s retaliatory tariffs are highly targeted, the impact on inflation would be modest. In addition, the weakening U.S. dollar as the reserve currency means that inflation might not rise as much as previously expected.”
James Orlando, director and senior economist at TD Bank
“Today’s inflation report gave some reprieve from the ongoing threat of higher prices. This was an encouraging development. Looking forward, April should show further easing of inflation as the elimination of the carbon tax has pushed energy prices significantly lower. That should more than offset the impact of tariffs, but not forever.
The Bank of Canada is meeting tomorrow, and the likelihood of another cut has shifted dramatically over the last week. The central bank will be weighing the inflation risk from tariffs against the downside risk coming from consumer/business sentiment surveys, a loosening job market, and a very weak real estate market. We are maintaining our call for another cut from the Bank, as it should take out more insurance against the mounting downside risks to the economy.”
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