Bank of Canada may pause rate cuts as inflation jumps and US tariffs add pressure

The Bank of Canada may pause its interest rate cuts next month after February’s inflation rate climbed to 2.6 percent, according to BNN Bloomberg.

The increase follows the expiration of the federal government’s temporary tax break, which had lowered inflation to 1.9 percent in January.

Statistics Canada reported that February’s inflation exceeded the 2.2 percent consensus forecast from economists polled by Reuters.

The expiry of the Goods and Services Tax (GST) and Harmonized Sales Tax (HST) exemptions on various household staples, common gifts, and restaurant bills contributed significantly to the inflation uptick.

Without the tax break in place for half the month, inflation would have reached 3 percent in February.

“We did expect a slight tick up due to the ending of the tax holiday, but 2.6 (percent) is certainly higher than what inflation has been for quite a while now,” RSM Canada economist Tu Nguyen said in an interview.

StatCan noted that without the tax break in place for half of February, inflation would have been three percent. Gas prices increased slightly by 0.6 percent from January to February, but the annual comparison showed a deceleration, which helped limit inflation growth.

Travel expenses also surged, with Canadians paying 18.8 percent more for travel tours, particularly due to increased trips to the United States over the February long weekend. 

Economists anticipate that the federal government’s decision to remove the consumer carbon price on April 1 could reduce inflation pressures.

Nguyen warned that US tariffs set to take effect on April 2 will “outweigh” any benefits from the carbon price removal. She noted that Canadian consumers may first see price increases in perishable US imports, followed by rising costs for appliances and durable goods. 

US President Donald Trump imposed a 25 percent tariff on steel and aluminum imports, prompting global retaliation. In response, Canada imposed reciprocal tariffs on $29.8bn worth of US goods. 

These trade tensions are expected to slow economic activity and drive-up prices on imports, adding to inflationary pressures. 

Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategy, stated in a note that March’s inflation data will likely remain elevated with the tax holiday fully removed from the equation.

“There’s plenty of noise still to come on inflation,” he wrote, adding that this complicates the Bank of Canada’s decision-making process.

The central bank reduced its key interest rate by a quarter point to 2.75 percent last Wednesday, with its next policy decision scheduled for April 16.

Governor Tiff Macklem recently acknowledged that the bank cannot fully offset the economic impact of tariffs and will focus on how inflation responds to the prolonged trade conflict. 

The Bank of Canada’s core inflation measures were “hotter than expected” in February and are expected to remain elevated, according to TD Bank senior economist Leslie Preston.

In a note to clients, she predicted that if US tariffs persist for six months before easing, the Bank of Canada could implement two more quarter-point rate cuts in its upcoming decisions.

However, Reitzes suggested that February’s inflation report might reinforce the Bank of Canada’s cautious approach, potentially leading to a pause in rate cuts.

“We’ll see what early April brings on the tariff front, but if the economic outlook doesn’t deteriorate further, the BoC will be considering a pause after cutting at seven straight meetings,” he stated. 

Financial markets, according to LSEG Data & Analytics, were pricing in a 62 percent chance that the Bank of Canada would hold its benchmark rate steady in April following the latest inflation data.

Nguyen also pointed out that concerns over inflation reigniting could influence the central bank’s decision.

“February inflation ... is going to give them second thoughts about reducing the rate again in April, we might see the bank choosing to pause at that meeting,” she said.