BofA: Bank of Canada expected to lower rates in April, despite inflation rise

Investing.com -- The Bank of Canada (BoC) is likely to reduce its rates in April, according to BofA Securities economist Carlos Capistran. This prediction comes despite the fact that Canada's CPI rising to 2.6% year-on-year in February, up from 1.9% in January. The primary driver of this increase was the cost of travel tours, which surged by 18.8% year-on-year, compared to 8.3% in January.

Inflation also felt the impact of the Goods and Services Tax/Harmonized Sales Tax (GST/HST) "tax holiday" ending on February 15. This applied upward pressure through products like food and alcoholic beverages. Meanwhile, gasoline prices slowed to 5.1% year-on-year, down from 8.6% in January. Excluding gasoline, the Consumer Price Index (CPI) rose 2.6% year-on-year, up from 1.7% in January.

In addition to headline inflation, core inflation, which excludes volatile items like food and energy, rose again to 2.9% from 2.7%. This increase was unexpected and has been rising for two consecutive months, signaling potential growing price pressures.

Despite the inflation surprise, Capistran expects the BoC to cut its rate by 25 basis points in its April 16 monetary policy meeting, bringing the rate to an estimated 2.50%. However, the decision will be influenced by U.S. "reciprocal tariffs" set for April 2 and the print of March's CPI on April 15. If tariffs are enacted, they could weaken the Canadian economy, pulling prices down and prompting the BoC to cut more. However, another print showing rising core could cause the BoC to adopt a "wait and see" approach, potentially stalling any rate cut.

In the currency markets, the inflation surprise and recent equity market recovery have helped to stabilize the USD/CAD around 1.43. The market's pricing of the anticipated April BoC rate cut has been adjusted due to the inflation surprise, supporting the Canadian dollar. The direction of USD/CAD after April 2 will likely be influenced by new tariffs announcements upon the release of America First Trade Policy review.