A surprise surge in inflation has complicated the path forward for the Bank of Canada on interest rates, say economists.
Statistics Canada has reported that the annual rate of inflation across the country rose to 2.6% in February, up sharply from 1.9% in January.
The spike in annualized inflation was due almost entirely to the federal government ending its temporary tax holiday that began last December ahead of Christmas.
Canadian consumers had enjoyed GST and HST tax holidays on household staples, gifts and restaurant meals during December, January and part of February.
That tax holiday ended in mid-February, sending consumer prices higher.
Still, the rise in inflation above the Bank of Canada’s 2% annualized goal could lead the central bank to pause its interest rate cuts, say some economists.
Moving forward, inflation could see a further uptick as the impact of import tariffs applied to American goods entering Canada is reflected in consumer prices.
Should inflation continue rising, it could lead the Bank of Canada to once again raise interest rates as it did throughout 2022 and 2023 to bring prices lower.
The February inflation reading was well ahead of the consensus expectation among economists who were polled by the Reuters news agency. They expected a 2.2% rise in inflation.
Perhaps worse, Statistics Canada said that without the tax holiday in place for the first half of February, annualized inflation would have come in at 3% for the month.
While gas prices rose 0.6% in February, the annual comparison showed a deceleration in the month, helping to reign in the overall increase in inflation.
The largest inflationary increase was seen in travel tours, which Canadians paid 18.8% more for in February, said Statistics Canada.
The Bank of Canada cut its benchmark overnight interest rate by 25-basis points to 2.75% earlier in March. It was the central banks seventh consecutive rate cut.
The Bank of Canada’s next interest rate decision is scheduled for April 16 of this year.
Financial markets are pricing in a 62% chance that the Bank of Canada holds its benchmark interest rate steady at its next policy meeting after the just released February inflation reading.
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