Experts predict rate cuts as GST/HST holiday and rising costs drive inflation volatility
Canada’s consumer price index (CPI) rose 1.8 percent in December compared to the previous year, according to Statistics Canada.
This figure fell slightly below the 1.9 percent increase economists had expected, as reported by Financial Post.
The federal government’s GST/HST tax holiday, which included exemptions on certain goods such as restaurant meals and alcoholic beverages, contributed to slower inflation growth for the month.
Excluding food prices, the CPI rose 2.1 percent in December.
Michael Davenport, an economist at Oxford Economics Canada, predicted inflation volatility in the coming months. He expects a rebound above two percent in March when the effects of the GST/HST tax holiday wear off.
Additionally, Davenport anticipates another rise in April as the federal carbon tax levy increases. He noted that potential US tariffs and the possible elimination of the carbon tax under a new government could further impact inflation.
“In the weeds” of the December CPI report, Davenport observed, “inflationary pressures still appear benign.”
He added that the Bank of Canada is likely to cut rates by 25 basis points later in January, focusing on broader economic trends and slack while disregarding temporary factors like the tax holiday.
David Rosenberg, founder of Rosenberg & Associates Inc., argued that the Bank of Canada’s work is “far from done” even after reducing rates by 175 basis points from a peak of five percent to the neutral range of 2.25–3.25 percent.
He noted that mortgage costs, which have driven inflation since 2022 rate hikes began, are excluded from his preferred inflation measure. Rosenberg calculated that inflation without mortgage costs stood at 1.3 percent year over year.
“This is not an attempt to downplay the importance of shelter costs as much as the need to point out that the other 70 percent of the pricing pie is tracking below a plus-one percent inflation rate now each and every month since last August,” he said.
He also highlighted a “disinflation” trend, suggesting that the Bank of Canada might need to reduce rates further to align with broader economic conditions.
Tu Nguyen, an economist at RSM Canada, called for additional rate cuts, noting a persistent trend of disinflation despite the temporary effects of the GST/HST tax holiday.
She expects the Bank of Canada to cut rates by 25 basis points at its upcoming meeting, following two larger reductions last year. Nguyen described the path ahead as “tricky,” citing challenges such as a weakening Canadian dollar and trade disruptions under the US administration.
She emphasised that further cuts might be needed after the tax holiday ends to maintain price stability and support economic growth.
“After the tax holiday ends, consumers will need the push of lower interest rates to keep up spending,” Nguyen said. Without these cuts, she warned, inflation could drop further below the two percent target, and economic growth might remain slow.
Derek Holt, head of capital markets economics at Scotiabank, took a different stance. He opposed additional rate cuts, arguing that core inflation measures remain elevated.
Holt pointed out that core median and trim CPI rates stood at 2.8 percent and 3.5 percent, respectively, on a seasonally adjusted annual basis.
He highlighted rebounding consumption and a potential two percent annualised gross domestic product growth rate for the fourth quarter as reasons to hold off on further reductions.
Holt also warned of inflationary pressures stemming from possible US tariffs and Canadian retaliatory measures.
“What’s the rush to cut after 175 basis points of cuts to date?” Holt asked, advocating for a pause in rate changes while keeping future options open.
