Latest inflation numbers leave economists split on whether Bank of Canada should hold or cut interest rates

While there's still volatility ahead, economists expect the Bank of Canada to look past all the noise and focus on "underlying inflation." Photo by Adam Huras/Brunswick News/Postmedia files

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Overall inflation accelerated 2.4 per cent in December from 2.2 per cent, but the Bank of Canada’s preferred core measures decelerated, leaving economists split on whether the central bank should hold or cut rates as market bets evaporate that the next move will be a hike.

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Statistics Canada attributed the jump in the consumer price index (CPI) to the federal government’s GST/HST holiday from mid-December 2024 to mid-February 2025, which lowered prices on a select group of items. Economists tracked by Bloomberg had called for inflation to hold steady at 2.2 per cent.

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Citigroup Inc. correctly called for CPI to rise to 2.4 per cent, while Toronto-Dominion Bank, Bank of Montreal and Capital Economics Ltd. had calls of 2.3 per cent.

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The Bank of Canada’s preferred measures of inflation, core trim and median, cooled — the former to 2.7 per cent and the latter to 2.5 per cent — from 2.8 per cent in November. Both measures strip out the effect of taxes.

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Markets had previously increased bets for the Bank of Canada’s next move to be a hike, but those bets were trimmed back to about 43 per cent by year-end from 80 per cent.

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Here’s what economists think the inflation data mean for the Bank of Canada and interest rates.

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‘Non-threatening’: Rosenberg Research

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“There is no case here for the Bank of Canada to even think about raising rates,” David Rosenberg, founder of Rosenberg Research & Associates Inc., said in a note, adding that monthly inflation has registered at a “nonthreatening” 0.3 per cent seasonally adjusted rate for the past six months.

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Meanwhile, core inflation, which excludes food and energy, has yet to breach the 0.3 per cent level once during the same time period.

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“The year-over-year trend may be at 2.5 per cent, but the fact that the six-month trajectory is down to nearly a two per cent annual rate is testament to the disinflation momentum underway,” he said.

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Inflation was “benign” in a wide set of categories, including household operations and furnishings, clothing, transportation, shelter, recreation and health and personal care, coming in between -0.1 per cent and 0.2 per cent month over month.

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Rosenberg said year-over-year real gross domestic product (GDP), which excludes inflation, is barely above zero, headline CPI is within the Bank of Canada’s target zone and full-time job creation has slowed to 0.7 per cent year over year.

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Then there are the ongoing threats posed by United States tariffs.

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“While the Bank of Canada may well stay on the sidelines for now, the fact that underlying inflation is staying relatively benign tells us the balance of risks remains towards more easing, not a tightening,” he said.

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Contracting economy: Capital Economics

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“The second consecutive below-target monthly gain in CPI-trim and CPI-median should further reduce speculation that the Bank of Canada will need to hike interest rates this year,” Stephen Brown, deputy chief North America economist at Capital Economics Ltd., said in a note.