Economists more confident in Bank of Canada rate hold as inflation ticks up to 1.9%

Statistics Canada said without the federal government’s GST break, which ended this month, overall inflation would have risen to 2.7% in January. The post Economists more confident in Bank of Canada rate hold as inflation ticks up to 1.9% appeared first on MoneySense.

Feb 18, 2025 - 22:37

Economists more confident in Bank of Canada rate hold as inflation ticks up to 1.9%

Economists are more confident the Bank of Canada might pause its interest rate cuts next month—tariffs notwithstanding—as Canada’s annual inflation rate ticked back up in January.

Statistics Canada’s consumer price index on Tuesday reported the annual inflation rate rose to 1.9% last month, up from 1.8% in December, as the effects from a full month of the federal government’s GST break were offset by higher fuel costs.

What’s affecting Canada’s overall inflation rate?

“I think what’s really the key here is that some of the core measures of inflation, again, were a little bit hotter than maybe the Bank of Canada would like to see,” said CIBC senior economist Andrew Grantham in an interview.

“There’s a lot of moving pieces here, but overall maybe a touch stronger than we expected in terms of the underlying inflation trends.”

The agency reported prices at the pump jumped 8.6% year-over-year, in large part because of a 25.9% spike in Manitoba, where the province reintroduced its provincial gas tax after a temporary suspension through 2024.

Meanwhile, natural gas prices rose 4.8% annually in January, with an increase in demand pushing prices higher in Ontario and Quebec compared with an oversupply a year ago, Statistics Canada said.

Restaurant food prices declined by a record 5.1% from a year ago, helping to tame the headline inflation number.

Inflation and the GST break

Statistics Canada said without the federal tax break, overall inflation would have risen to 2.7%, up from 2.3% in December.

The GST tax break ended over the weekend after two months.

“It is a little bit concerning,” Grantham said of the 2.7% figure, but added a lot of it stems from rising gasoline prices.

He said CIBC is expecting inflation to be “a little bit” over two per cent by March as the GST break’s impact fades, along with the effect of gas prices.

“These prices and levels that we’re at at the moment will converge a little bit, and will accelerate. But not as much as that 2.7% excluding the GST impact would suggest,” Grantham said.

Bank of Canada interest rate expectations as tariffs loom

He said if not for the threat of tariffs from the United States, the Bank of Canada might look to hold its policy interest rate on March 12.

The central bank brought its benchmark rate down to 3% in January, its sixth consecutive rate cut.

“We continue to lean to the view that the (Bank of Canada) will take a pause at their next decision, although developments on the tariff front may yet have a big say in that call,” BMO chief economist Doug Porter wrote in a note to clients.

The Bank of Canada held a lengthy discussion on the possibility of tariffs ahead of its decision to cut rates last month. Notably, even in the absence of tariffs, the threat itself was weighing on the Canadian economy.

The council agreed a quarter-percentage-point reduction in the benchmark rate would be helpful to support growth and better balance inflation risks.

Stephen Brown, deputy chief North America economist at Capital Economics, said in a note to clients there was “clear evidence” in Tuesday’s report that underlying inflation pressures were building.

“That suggests the Bank of Canada is getting close to the end of its loosening cycle, although the outlook for monetary policy ultimately hinges on whether President (Donald) Trump soon imposes stiff tariffs on imports from Canada,” Brown said.

The annual inflation rate continues to face upward pressure from mortgage interest costs, increasing at a rate of 10.2% from a year ago, though this is the 17th consecutive month of deceleration after a peak of 30.9% in August 2023.

With an increasing share of inflation components rising faster than 3% in January, Royce Mendes, managing director and head of macro strategy at Desjardins, said he’s sticking with his belief that the central bank will hold rates steady when it meets again in March, “but that call is still contingent on tariff news and upcoming data releases co-operating.”

What inflation looks like across Canada

Canada’s annual inflation rate was 1.9% in January, Statistics Canada says. Here’s what happened in the provinces (previous month in brackets):

Newfoundland and Labrador: 0.8% (0.6%)
Prince Edward Island: 1.3% (0.4%)
Nova Scotia: 1.3% (0.9%)
New Brunswick: 0.9% (1.6%)
Quebec: 1.8% (1.6%)
Ontario: 1.7% (1.7%)
Manitoba: 2.7% (1.1%)
Saskatchewan: 2.4% (1.8%)
Alberta: 2.5% (2.5%)
British Columbia: 2.2% (2.6%)

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The agency also released rates for major cities, but cautioned that figures may have fluctuated widely because they are based on small statistical samples (previous month in brackets):