"February inflation is going to give them second thoughts about reducing the rate again"
A sudden spike in inflation is complicating the Bank of Canada’s interest rate strategy, with some economists now questioning whether the central bank will pause its rate-cutting cycle next month.
Statistics Canada reported that annual inflation climbed to 2.6% in February, a sharp increase from January’s 1.9%. The rise came as the federal government’s temporary tax break ended mid-month, leading to higher costs for restaurant meals, alcoholic beverages, and children’s clothing. The figure was significantly above economists’ expectations of 2.2%.
“We did expect a slight tick up due to the ending of the tax holiday, but 2.6% is certainly higher than what inflation has been for quite a while now,” said Tu Nguyen, economist at RSM Canada.
If the tax break had not been in effect for part of February, inflation would have landed even higher, at 3%, according to StatCan.
With the next interest rate decision set for April 16, economists say the inflation data adds another layer of uncertainty to the Bank of Canada’s strategy. Last week, the central bank lowered its benchmark rate to 2.75%, citing a cooling economy and global trade pressures.
However, the ongoing US-Canada trade dispute could push inflation even higher. US president Donald Trump has threatened a new wave of tariffs set to take effect on April 2, a move that could raise the cost of imported goods for Canadian consumers.
Nguyen warned that the impact of these tariffs could “outweigh” the benefits of the government’s planned consumer carbon tax cut, which is set to take effect on April 1. Higher grocery prices could be the first sign of these pressures, followed by more expensive durable goods like appliances.
BMO’s Benjamin Reitzes noted that March’s inflation report is also likely to show another increase, making the Bank of Canada’s job even more difficult.
“There’s plenty of noise still to come on inflation,” he wrote in a note to clients, adding that the central bank may take a more cautious approach to future rate cuts.
Financial markets now see a 62% chance that the Bank of Canada will hold rates steady at its next meeting, according to LSEG Data & Analytics.
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Some economists still expect rate cuts to continue, but at a slower pace. TD Bank senior economist Leslie Preston said the bank is forecasting two additional 25-basis-point cuts in the coming months, assuming US tariffs remain in place for six months before easing.
However, if economic conditions stabilize, the Bank of Canada could take a wait-and-see approach.
“February inflation is going to give them second thoughts about reducing the rate again in April,” said Nguyen. “We might see the bank choosing to pause at that meeting.”
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