Analysts eye further interest rate cuts
Canada’s annual inflation rate is expected to have dropped to 1.6% in April, as economists point to the federal government’s elimination of the consumer carbon price and falling global oil prices as key factors behind the slowdown.
The consumer carbon price, which added roughly 18¢/L to gasoline, was removed on April 1. The move was one of prime minister Mark Carney’s first major policy decisions after taking office.
According to economists, this change alone is expected to reduce inflation by about 0.7 percentage points. The Bank of Canada has forecast that this dampening effect will continue through the year before falling out of year-over-year comparisons.
RBC economists Nathan Janzen and Abbey Xu noted that recent inflation figures continue to be influenced by policy shifts, including the carbon price removal and the earlier expiration of a temporary federal tax break in February. RBC expects inflation dropped from 2.3% in March to 1.6% in April.
Impact of oil prices
Tu Nguyen, an economist at RSM Canada, said global oil prices also declined in April due to slower economic activity worldwide and increased production from OPEC countries, contributing further to lower pump prices.
“We’re expecting a slower economy in the world overall this year, and OPEC countries increased production, so that led to lower oil prices,” Nguyen said in an interview with CTV News.
She added that easing inflation in rental housing has also helped keep overall inflation closer to the Bank of Canada’s 2% target.
However, any relief from lower transportation costs may be tempered by a growing trade dispute between Canada and the United States. April marked the first full month of retaliatory tariffs on steel, aluminum, and other goods. Nguyen said these developments could raise costs for businesses but are unlikely to significantly affect April’s inflation data.
“Because retaliation is still quite limited right now… I don’t think… the headline number would be dramatically too different,” she said.
The Bank of Canada held its key interest rate steady in April following seven cuts, citing uncertainty around the impact of tariffs. But signs of a weakening economy are mounting. Canada’s unemployment rate rose to 6.9% in April, with job losses in manufacturing.
TD Bank economist Marc Ercolao said recent data suggest the central bank has room for another rate cut. As of Friday, markets placed the odds of a 0.25-point cut in June above 64%, according to LSEG Data & Analytics.
Nguyen expects two more cuts this year, though she said they likely won’t come back-to-back as the Bank of Canada takes a cautious approach.
What are your thoughts on the impact of the carbon tax removal on inflation? Share your insights in the comments below.
