Canada’s Inflation Slows, Strengthening Case for Rate Cut

Inflation Eases in March, With Gas and Travel Costs Falling

Canada’s inflation rate unexpectedly slowed in March, dropping to 2.3%, according to Statistics Canada. The slowdown was largely driven by lower gasoline prices and a drop in travel costs. Economists had expected a rise to 2.7%, but the latest data shows a decrease in inflationary pressures, setting the stage for a potential policy rate cut by the Bank of Canada.

Factors Behind the Slowdown

The inflation slowdown was partly caused by the end of a temporary Goods and Services Tax (GST) and Harmonized Sales Tax (HST) break that had inflated prices in February, pushing costs higher in March. Gasoline prices saw a year-over-year decrease of 1.6%, primarily due to lower oil prices amid global demand concerns and potential economic slowdown from tariff threats.

Market Reactions and Predictions for Rate Cuts

According to CIBC economist Katherine Judge, the inflation data strengthens the argument for a 25 basis point rate cut at the Bank of Canada’s meeting on Wednesday. Judge noted that the risks to growth from the trade war outweigh any inflationary pressures caused by tariffs. Markets have shifted their expectations, increasing the likelihood of a rate cut from 35% to 45%, reflecting investor sentiment post-release.

Core Measures Show Stability

Despite the headline inflation drop, core measures such as CPI-trim and CPI-median remained elevated, with minimal change. These figures exclude volatile components like taxes and are closely watched by the Bank of Canada. On a monthly basis, inflation rose by 0.3%, though seasonally adjusted CPI remained flat in March.

Looking Ahead: Rate Cuts and Economic Growth

The Bank of Canada has already cut rates at its past seven meetings, bringing the policy rate to 2.75%. Economists suggest that further rate cuts could be necessary to mitigate potential economic slowdown caused by trade tensions and global uncertainty. However, while the Bank of Canada may consider a “insurance” cut, the central bank remains cautious about long-term inflation risks.