Canada’s inflation rate rose to 1.9% in January, despite the national GST holiday, raising concerns that the Bank of Canada (BoC) may delay further interest rate cuts when it meets in March.
According to Statistics Canada, energy prices were the biggest driver, increasing 5.3% year-over-year, with gasoline costs surging 8.6%. Shelter costs also climbed 4.5%, maintaining pressure on household expenses.
While inflation remains below the BoC’s 2% target, removing the GST break would have pushed the Consumer Price Index (CPI) up to 2.7%, signaling stronger underlying price pressures. Meanwhile, food prices recorded their first annual decline since 2017, falling 0.6%, and alcohol prices dropped 3.6% due to temporary tax relief, which ended on February 15.
The latest inflation reading presents a challenge for the central bank. Claire Fan, senior economist at RBC, noted that policymakers may pause rate cuts in March as they analyze price trends excluding the tax holiday’s impact. BMO chief economist Doug Porter also warned that inflation could rise “quickly” in the coming months with the GST break now expired.
While a March rate cut remains unlikely, it is still possible if U.S. President Donald Trump proceeds with new tariffs on Canadian imports. Mortgage interest costs continue to be a major contributor to inflation, though their impact is gradually easing as earlier rate cuts take effect.
Looking ahead, RBC predicts a weaker economy and labor market could put downward pressure on inflation later in 2025, potentially leading to further rate cuts. CIBC economist Andrew Grantham forecasts the BoC’s overnight rate could drop to 2.25%, but noted that future policy decisions will depend on how tariff uncertainties unfold and on upcoming GDP and employment data.
With uncertainty surrounding both inflation and trade policies, the BoC’s next move will be closely watched, as its decision could shape Canada’s economic trajectory for the rest of the year.