Bank of Canada rate decision too close to call after soft March inflation report

OTTAWA — A surprise slowdown in inflation last month has turned the Bank of Canada’s interest rate decision on Wednesday into a coin toss, with some economists leaning toward a hold and others saying a cut is warranted.

The annual rate of inflation slowed to 2.3 per cent in March, Statistics Canada said Tuesday, down from 2.6 per cent in February.

A poll provided by LSEG Data & Analytics ahead of the release had expected yearly inflation to hold steady month-to-month.

StatCan pointed to drops in prices for gasoline, cell phone plans and the costs of travel tours — particularly with a chill in U.S. travel demand — as factors in cooling inflation last month.

James Orlando, director of economics at TD Bank, said he expects that headline inflation will continue to decline in April with the removal of the consumer carbon price already driving costs lower for motorists this month.

The March inflation data comes a day before the Bank of Canada is expected to make its next interest rate decision after cutting its policy rate by a quarter point to 2.75 per cent last month.

Orlando said the central bank will be weighing a ton of risks related to the trade war heading into Wednesday’s decision, including a slowdown in exports, hits to consumer and business confidence and a possible recession hitting the economy this year.

“All of these things are downside risks the Bank of Canada should be paying attention to,” he said.

But as of Tuesday afternoon, LSEG Data & Analytics had the probability of an interest rate cut or hold on Wednesday as almost a toss-up, with odds nearly evenly split between a hold and a cut.

With a number of factors pushing the central bank to lower interest rates in order to cushion the economic blows, Orlando said inflation is also well-behaved enough for now to keep the central bank’s rate on a downward path without reigniting price hikes.

“The fact today we got inflation that was pretty close to two per cent should make the Bank of Canada feel that at least for right now — not in the future, but at least for right now — inflation is pretty well maintained around their target,” he said.

Economists at other large banks in Canada, including CIBC and RBC, also put themselves in the rate-cut camp on Tuesday. CIBC senior economist Katherine Judge pointed to signs of stability in underlying inflation as justifying another cut.

The central bank is also expected to release an updated monetary policy report on Wednesday but has warned it may not include a singular, guiding economic outlook amid increased uncertainty.

Back in late March, Bank of Canada governor Tiff Macklem signalled a shift in how the central bank approaches setting rates amid an ever-shifting tariff dispute with the United States.

He said the central bank would focus more on setting monetary policy appropriate to a range of risks facing the Canadian economy, rather than treating one forecast as the most likely path forward and adjusting rates to suit it.

Randall Bartlett, deputy chief economist at Desjardins, said in a note to clients Tuesday that the inflation slowdown gives the Bank of Canada more “breathing room,” but he’s unconvinced it’s enough to push the central bank to an eighth consecutive cut.

Desjardins does expect the central bank will return to rate cuts in due course.

But Bartlett warned that the upcoming economic hit from the Canada-U.S. tariff dispute will also see prices rise in the year ahead, threatening to stoke inflation again.

“We remain of the view that the (Bank of Canada) will stay on hold in April while it keeps some powder dry for the ongoing trade imbroglio with the United States,” he said.

Tuesday’s inflation figures also showed the trade war was helping to cool some prices, however.

StatCan prices for travel tours fell 4.7 per cent annually last month and airfare costs were down 12 per cent year-over-year in March.

The agency said the moderation in flight costs came as fewer Canadians traveled to the United States last month, when many families typically get away for March break.

March marked the beginning of the United States’ tariff war with Canada, which has prompted some consumer backlash toward U.S. travel and products in recent weeks.

Orlando said while the cost of goods imported to the U.S. may well rise thanks to the combination of tariffs, counter-tariffs and the relative weakness of the Canadian dollar, the effects of slowing demand could see prices move in the opposite direction.

“Push-and-pull factors are something we need to get used to here,” he said. “I think Canadians are going to be a little bit more sticker sensitive when it comes to their shopping habits.”

After some relief from the consumer carbon price elimination in April, TD is expecting inflation to rise back around the three per cent mark by May or June.

Limiting the overall slowdown in inflation last month was the end of the federal government’s temporary tax holiday in mid-February.

March was the first full month without the federal sales tax relief on a variety of household staples and dining out, which StatCan said provided some lift in the inflation figures compared with February.

Restaurant prices, for instance, rose 3.2 per cent annually in March following a 1.4 per cent decline in February. Overall food costs including groceries also rose 3.2 per cent year-over-year, up from 1.3 per cent a month earlier.

This report by The Canadian Press was first published April 15, 2025.

Craig Lord, The Canadian Press