The latest inflation reading from Statistics Canada would usually send a clear signal that the Bank of Canada will go ahead with another interest rate cut. The headline inflation rate, also known as the Consumer Price Index, for December came in at 1.8%, down one notch from 1.9% in November. That is solidly within the Bank’s preferred range of 1.0% to 3.0% and just slightly below the 2.0% target rate.
However, the key reason for the decline is the federal government’s GST holiday that started on December 14 and runs until February 15.
The BoC has said it will “look through” the effects of the tax holiday when making its rate decisions but it is widely expected there will be another quarter-point cut at this week’s setting. The Bank is also saying it intends to slow the pace of rate cuts as it works to manage core inflation. It averaged 2.5% in December but it has been facing upward pressure over the past three months. Good economic growth and employment have also reduced the need for urgent interest rate cuts.
The big question, though, is: What will the Americans do?
The new administration in Washington continues to threaten damaging, 25% tariffs on all Canadian goods entering the U.S. Penalties of that magnitude could conceivably push Canada’s economy into recession and give the BoC more latitude for rate cuts.
So far the tariffs have not happened and there are increasing signals coming out of the White House that the administration is backing away from the worst of its threats. Official announcements are scheduled for February 1.