Canada’s inflation rate surprisingly cooled in March as travel-related prices fell during the month, setting up a hotly debated Bank of Canada interest rate decision on Wednesday that is clouded by the trade war.
The consumer price index (CPI) rose 2.3 per cent in March from a year earlier, down from 2.6 per cent in February, Statistics Canada said on Tuesday. Financial analysts had expected higher inflation of 2.7 per cent, because of upward pressure from the end of the federal tax holiday in mid-February.
Consumer prices rose 0.3 per cent on a monthly basis, lagging way behind estimates of a 0.7-per-cent gain.
Inflation has largely resided near the Bank of Canada’s 2-per-cent target since last summer, allowing the central bank to cut rates at seven consecutive meetings.
But the bank’s next rate decision, on Wednesday, is hardly certain, because of the fallout from the global trade war launched by U.S. President Donald Trump. American trade policies, which often change by the day, are making it near impossible for central bankers to forecast the economic outlook.
Economists and analysts are roughly split over whether the Bank of Canada will cut its policy rate again or hold it steady at 2.75 per cent. The interest rate swaps market – which captures investor expectations of monetary policy – is leaning toward a hold, although not by a wide margin, according to LSEG data.
Still, there are several analysts on Bay Street who think the central bank will cut for an eighth consecutive time to support a Canadian economy on shaky ground.
“The central bank will be weighing the inflation risk from tariffs against the downside risk coming from consumer/business sentiment surveys, a loosening job market, and a very weak real estate market,” James Orlando, senior economist at Toronto-Dominion Bank, said in a client note.
“We are maintaining our call for another cut from the bank, as it should take out more insurance against the mounting downside risks to the economy,” he added.
Tuesday’s inflation report showed a cool-down on several fronts. Gasoline prices fell 1.8 per cent in March from February. Excluding gas, the CPI rose 2.5 per cent on an annual basis, down from 2.6 per cent in February.
The removal of the federal consumer carbon price on April 1, combined with a drop in global oil prices, has led to a sizeable decline in gas prices this month that will put downward pressure on the April CPI numbers.
Travel prices, meanwhile, fell during the normally busy spring break period. Prices for travel tours dropped 8 per cent in March from February, while airfare prices tumbled 12 per cent from a year earlier.
Statscan has published several reports that show Canadians are not making trips to the United States because they’re protesting Mr. Trump’s tariffs and his repeated jibes about Canadian sovereignty. The number of Canadians returning from the U.S. by car plummeted 32 per cent in March, year over year.
“The big story here was a steep drop in travel tour prices and a meaty drop in airfares from year-ago levels, as Canadians pulled back abruptly on U.S. travel in prime time,” said Bank of Montreal chief economist Doug Porter in a client note.
The Bank of Canada’s preferred measures of core inflation – which strip out volatile movements in the CPI – also eased in March. On a three-month annualized basis, those measures rose by an average of 2.7 per cent in March, down from 3.3 per cent in February.
The central bank faces a unique challenge in a trade war, which constrains economic growth but pushes up prices – outcomes that typically prompt different interest rate decisions.
Thus far, the U.S. has imposed tariffs on imports of Canadian goods that aren’t compliant with the North American trade pact, along with sectoral duties on steel, aluminum, autos and lumber.
Canada has retaliated by placing tariffs on $60-billion worth of imported U.S. goods, along with duties on U.S.-made vehicles. These tariffs will raise prices for Canadian consumers but are intended to put pressure on the Trump administration to reverse its trade policies.
Bank of Canada Governor Tiff Macklem said last month that the central bank would be “less forward-looking than normal” in setting interest rates because of the hazy outlook, but he’s also stressed that it will “proceed carefully” with any further changes to rates. The bank says it is trying to prevent a tariff-induced price shock from escalating into persistently higher inflation, suggesting it is unlikely to slash rates to near zero as it has in past economic crises.
“In a financial crisis or pandemic, time is of the essence. However, in a trade war, things are slower moving,” said Royce Mendes, head of macro strategy at Desjardins Securities, in a client note. Desjardins expects the Bank of Canada to lower rates by an additional percentage point over this year but pause on Wednesday.
“Officials have the luxury of not being forced into a decision they may later regret,” Mr. Mendes added.