OTTAWA – A surprise jump in inflation and a flood of “noise” in the economy may push the Bank of Canada to pause its interest rate cuts next month, some economists argue.
Statistics Canada said Tuesday that the annual rate of inflation accelerated sharply to 2.6 per cent in February as the federal government’s temporary tax break came to an end mid-month.
That marks a sizeable jump from the 1.9 per cent increase seen in January, when Canadians saw GST and HST taken off a variety of household staples, common gifts and restaurant bills for the entire month.
February’s figures were also well ahead of the consensus among economists polled by Reuters, which called for 2.2 per cent inflation in the month.
“We did expect a slight tick up due to the ending of the tax holiday, but 2.6 (per cent) is certainly higher than what inflation has been for quite a while now,” RSM Canada economist Tu Nguyen said in an interview.
StatCan’s consumer price index is based on final prices paid by Canadians, meaning sales taxes are included in the agency’s calculations.
Restaurant meals fuelled most of the acceleration in headline inflation from January, the agency said, with other tax-exempt categories such as alcoholic beverages and children’s clothing and toys also contributing.
StatCan calculations show that, without the tax break in place for half a month, inflation would have come in at three per cent in February.
While gas prices were up 0.6 per cent from January to February, StatCan said the annual comparison showed a deceleration last month, helping to rein in the overall rise in inflation.
Elsewhere, Canadians were paying 18.8 per cent more on travel tours last month. StatCan pointed to increased travel to the United States over the long weekend in February which most provinces observe.
Economists expect Ottawa’s move to strike the consumer carbon price as of April 1 will take some steam out of the inflation figures next month.
But Nguyen argued the pressure from the trade dispute — U.S. President Donald Trump has threatened another wave of tariffs will arrive on April 2 — will “outweigh” the benefits of eliminating the carbon price for consumers.
She said Canadians can expect higher prices to show up first at the grocery store in the perishable items that Canada imports from the U.S., followed by appliances and other durable goods in the months to come.
Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, said in a note Tuesday that March’s inflation data will also likely show an uptick with the tax holiday now completely gone from the equation.
“There’s plenty of noise still to come on inflation,” he wrote, which complicates the Bank of Canada’s efforts to set its benchmark interest rate.
The Bank of Canada cut its key rate by a quarter point to 2.75 per cent last Wednesday, with its next decision set for April 16.
Governor Tiff Macklem said last week that the central bank can’t fully offset the hit to Canada’s economy from steep tariffs and will focus on how inflation reacts to the pressures from a prolonged trade war.
The central bank’s preferred metrics of core inflation came in “hotter than expected” in February and are poised to keep rising in the months ahead, TD Bank senior economist Leslie Preston said in a note to clients on Tuesday.
She said that, based on a forecast where U.S. tariffs remain in place for six months before abating, TD is calling for a pair of quarter-point cuts at the Bank of Canada’s next two decisions.
But Reitzes said he expects the February inflation report will reinforce the central bank’s “cautious tone” on using its policy rate to offset the hit to Canada’s economy from tariffs.
“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,” Reitzes said.
Financial markets were pricing in a roughly 62 per cent chance the Bank of Canada holds its benchmark rate steady at its next decision after the release of February’s inflation data, according to LSEG Data & Analytics.
Nguyen also said fears that inflation could reignite and unwind the progress made to date in taming price pressures could see the Bank of Canada lean toward a hold, depending on what developments unfold on the tariff front in the coming month.
“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.
This report by The Canadian Press was first published March 18, 2025.
