Inflation rate falls to 2.8% in February

Analysts surprised as data comes in lower than expected

Canada’s annual rate of inflation unexpectedly fell to 2.8 per cent in February, which could increase pressure on the Bank of Canada to start lowering interest rates sooner than expected.

According to data released Tuesday morning by Statistics Canada, the Consumer Price Index — a broad-based measure of inflation — was 2.8 per cent higher in February than it was a year earlier. That’s down from 2.9 per cent in January. Most analysts had expected it to rise to 3.1 per cent.

In a research note, BMO chief economist Douglas Porter noted that it was the second straight month inflation had fallen unexpectedly, and said it could open the door to the Bank of Canada cutting interest rates as soon as April.

“It’s difficult to poke any holes in this report. We’re not the only analysts caught by surprise at how modest these inflation rates of the past two months have been,” Porter wrote.

Even the Bank of Canada itself, noted Porter, predicted in January that inflation would average 3.1 per cent in the first quarter of the year.

“We are now headed for 2.8 per cent. That’s a big and welcome difference, but is it enough for rate cuts?” Porter wrote.

Tuesday’s release was the last bit of inflation data the Bank of Canada is getting before making its next interest rate announcement in April. It was also the second straight month inflation was lower than expected.

The bank is widely expected to start cutting its key overnight interest rate later this year, after having raised it 10 times since March 2022 in an attempt to get inflation under control. The bank has kept the overnight rate at five per cent for five straight decisions.

The theory is that by making it more expensive to borrow money, consumers and businesses will spend less, driving prices down prices and slowing the economy.

While inflation has fallen since hitting a high of 8.1 per cent in June 2022, it’s still above the bank’s target of two per cent.

While BMO’s official forecast — similar to many other analysts — calls for the Bank of Canada to start cutting rates in June, Porter said it could come sooner.

“April still seems too early to be pulling the trigger on rate cuts, though it can’t be entirely ruled out,” Porter wrote.

Trading on the overnight interest swap market is now pricing in a 60 per cent chance of a rate cut in June, and a 25 per cent chance of a cut in April.