Canada inflation cools as Iran war clouds next BoC move
Canada’s inflation downshift in February landed at exactly the moment policymakers least wanted a surprise.
Annual CPI eased to 1.8%, undercutting economist expectations of 1.9% and moving below the Bank of Canada’s 2% target just as the Iran war pushed global oil prices sharply higher.
The data, shaped by base‑year effects from last year’s GST/HST holiday, effectively bought the Bank time at its next decision, even as the Middle East conflict threatened to drive energy costs – and headline inflation – back up in the months ahead.
Tame core gave BoC room to wait
Economists stressed that the softness in underlying inflation, rather than the headline print alone, matters most for Wednesday’s rate call.
Core measures CPI‑median and CPI‑trim both slipped to 2.3%, while CPI excluding food and energy edged down to 2.0%.
“The tame report will be welcomed by policymakers ahead of the energy price shock, as it shows that labour market slack is keeping a lid on core prices, with the issue for the BoC being how long the oil price shock lasts for and its magnitude,“ CIBC economist Katherine Judge wrote.
Claire Fan, senior economist at RBC, said, "At this week’s meeting, we expect the BoC to recognize growing external uncertainty but continue to hold the overnight rate at its current, borderline accommodative level of 2.25%."
BMO chief economist Douglas Porter wrote that “the Bank should be considering cutting rates, not raising them, in this economic backdrop.“
He added that “with most measures of core inflation close to the Bank's two per cent target, policymakers can more readily look through the oil-driven spike that is surely coming to headline inflation in the next few months,” pointing to weak recent jobs data and uncertainty around the Canada–U.S.–Mexico Agreement.
Desjardins economist Royce Mendes said the “weak” inflation print would allow the central bank to “leave rates unchanged until well into 2027.”
The C.D. Howe Institute’s Monetary Policy Council urged the Bank to keep its overnight rate at 2.25% for the next 12 months, underscoring how fragile the outlook remains for growth, inflation and housing – and how little rate relief mortgage borrowers are likely to see in the near term.
Oil shock from Iran war looms over benign print
The Iran war and effective closure of the Strait of Hormuz has pushed Brent and US crude back toward or above US$90–$100 per barrel, with analysts warning of renewed global inflation pressure as higher fuel and shipping costs worked through supply chains.
Those dynamics are especially sensitive for Canada. The Bank recently reaffirmed its 2.25% policy rate, signalling a “steady‑as‑she‑goes” stance as inflation hovered near target. A sustained oil spike could force policymakers to weigh imported energy inflation against an already muted housing cycle.
TD Economics struck a similar tone. “Canada's inflation cooled in February, but that is backward looking now that prices at the pump have skyrocketed in the wake of the U.S./Israeli war with Iran,” Leslie Preston, managing director and senior economist said.
“We expect higher energy costs will lift headline inflation close to 3% in the months ahead, but the effect on the Bank of Canada's core measures should be more modest... The Bank of Canada's interest rate decision is coming up on Wednesday, and the Bank is universally expected to remain on pause.”
Source CMP
By Liezel Once
