Bank of Canada interest rate cut odds jump following unexpectedly slow March inflation data #CanadaFinance

The Bank of Canada has a stronger case to cut its policy rate at its next meeting on Wednesday, say economists responding to the latest inflation data. Statistics Canada reported the annual rate of inflation slowed unexpectedly in March to 2.3 per cent, driven largely by lower gasoline and travel costs.

In a release Tuesday, Canada’s federal data agency says the slowdown was held back by the end of the temporary break on the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) on Feb. 15, which put upward pressure on prices for eligible products in March versus February.

Gasoline prices fell 1.6 per cent year-over-year in March. Statistics Canada says this was largely due to lower oil prices (CL=F) amid concerns of slowing global demand, and slowing economic growth related to the threat of tariffs.

“Canadian inflation slowed sharply in March,” CIBC economist Katherine Judge wrote in a note to clients on Tuesday. “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.”

Economists had expected the Consumer Price Index (CPI) to rise to 2.7 per cent in March, according to consensus estimates published by CIBC Capital Markets. CIBC’s team of economists called for a 2.5 per cent reading. Scotiabank Economics and BMO Economics predicted an increase to 2.7 per cent.

Canada’s annual inflation rate jumped to 2.6 per cent in February, following an increase of 1.9 per cent in January.

Besides falling gas prices, lower costs in the recreation, education, and reading category helped push inflation lower in March. Air transportation prices fell 12 per cent year-over-year, adding to a 4.4 per cent decline in February. Prices for cellular services also fell 8.8 per cent on an annualized basis. Statistics Canada notes lower prices for cell phone plans amid industry-wide promotions saw prices fall 6.8 per cent from February to March.

“While economists estimated that the end of the 2024 Holidays’ GST rebate and tariffs on U.S. food and alcohol items would drive inflation higher, broad based disinflationary factors combined to lower gasoline prices from the removal of the carbon tax appear to offset these changes,” Dominique Lapointe, Manulife Investment Management’s director of macro strategy, stated in an email.

“We think the morning’s print goes a long way to reassure the BoC about underlying inflation and as such reinforces our expectation of a cut at tomorrow’s meeting,” Lapointe added. “While it is not the economists consensus, it’s worth noting that markets have moved from pricing in 35 per cent to 45 per cent odds of a cut after this release.”