The end of the federal tax holiday brought an increase in Canada’s inflation rate for February. Now the Bank of Canada will be looking at potential changes to its interest rate policy.
Inflation Jumps Higher than Expected
A jump in inflation had been expected when the GST (and HST) went back into effect on February 15, but the reading of 2.6% was significantly higher than forecast. Analysts had been predicting a 2.2% annualized rate of headline inflation – also known as the Consumer Price Index – up from 1.9% in January. More importantly the Bank of Canada’s preferred measures of core inflation are persisting at levels above the Bank’s 1.0% - 3.0% target range.
CPI-trim and CPI-median, which remove taxes and volatile items like food and fuel from the calculation, are sitting at 3.3%. Canada is also waiting to see what effect American tariffs will have on the economy, particularly inflation. That has many market watchers forecasting a pause in rate cuts by the BoC.
Cut or Pause?
The Bank’s trendsetting overnight Policy Rate is now 2.75%, following a quarter-point cut on March 12. Analysts are now divided on whether there will be another cut on April 16, or whether the Bank will hold. More tariffs are set to take effect on April 2.
Looking for a New Neutral
There are also renewed discussions about what the Bank’s, so called, “neutral” rate will be. That is the point where the Policy Rate neither encourages nor discourages economic growth. The Bank had felt the neutral rate would fall between 2.25% and 3.25%. In the last quarter, or so, that number seems to have been pushed upward slightly, with many experts saying the current 2.75% setting is the new neutral.