Canada’s inflation rate dropped to 1.7% in April from 2.3% in March, driven by falling energy prices after the federal government removed the consumer carbon tax and global oil prices declined. Gasoline prices plunged 18.1% year over year, while natural gas fell 14.1%.

Despite relief at the pump, core inflation in areas like food, vehicles, and services remains high, complicating the Bank of Canada’s decision-making. Economists warn underlying price pressures, partly due to trade tensions and tariffs, could delay rate cuts.

The Bank of Canada faces an unusual challenge in that U.S. tariffs and Canada’s retaliatory tariffs are combining to short circuit the central bank’s mandate. It is committed to balancing its overriding commitment to keeping annual inflation within the 2-3% range with efforts to keep the economy growing as strongly as possible. But tariffs amount to a recipe for stagflation, driving up prices while simultaneously undercutting economic growth.

‘Pervasive uncertainty’

“Despite below-target inflation in April, we still expect the Bank of Canada will hold rates in neutral territory as it tries to manage pervasive uncertainty, while balancing the hit to the economy from the trade war against upside risks to inflation from tariffs and supply disruptions,” said Tony Stillo, director of Canada economics at Oxford Economics.

Overall, market-implied probabilities of a June 4 rate cut by the Bank of Canada fell to below 50% in the immediate aftermath of the CPI report. However, traders expect the Bank of Canada will go on to trim rates one or two more times before the end of this year in response to the economic slowdown stemming from the U.S. administration’s attempt to erect a protectionist wall at the Canadian border.

The inflation data took market participants by surprise, said The Globe and Mail’s Darcy Keith, who collected the written commentaries of economists and market strategists. Reactions and projections were mixed and inconsistent.

Economists weigh in

Thomas Ryan (Capital Economics), Douglas Porter (BMO Capital Markets) and Bryan Yu (Central 1 Credit Union) expect the BoC to cut interest rates in June.

Victoria Clark (Citi) said an interest rate cut in June is “now a close call.” Andrew Grantham (CIBC Capital Markets) said the BoC will have a tough decision regarding rate cuts in June.

Jules Boudreau (Mackenzie Investments) and David Doyle (Macquarie) predict a July cut.

Boudreau said tariffs only have a marginal direct impact on Canadian inflation, with higher government spending posing bigger risks.

Derek Holt (Scotiabank Economics) said there’s “no way” the BoC should cut rates soon or at all. He said other domestic forces, beyond the U.S. tariffs, are keeping inflation at high levels.

Nick Rees (Monex Canada) wrote the “overall picture” suggests that U.S. tariffs could push inflation in both Canada and the U.S.

Nathan Janzen and Abbey Xu (Royal Bank of Canada) predict the BoC will cut interest rates in the summer. They said the BoC must balance pessimistic growth forecasts with inflation pressures.

Douglas Porter (BMO Capital Markets) and Andrew Hencic (TD Economics) predict further cuts this year, but they don’t specify a timeline. Hencic predicts two more cuts this year.

Tu Nguyen (RSM Canada) and David-Alexandre Brassard (Chartered Professional Accountants of Canada) predict a rate hold in June. Brassard said the BoC will need more evidence of economic strain before cutting rates.