Canada's annual inflation rate slowed to 2.3% in March, down from 2.6% in February, led by falling gasoline, air travel, and cellular service prices, Statistics Canada reported Tuesday. However, rising prices tied to the end of a temporary federal tax break have moderated the overall deceleration, leaving the Bank of Canada (BoC) in a delicate position ahead of its upcoming rate decision.

The Consumer Price Index (CPI), excluding gasoline, rose 2.5% year over year in March, just slightly below February’s 2.6%. Month over month, CPI rose 0.3%, though seasonally adjusted figures showed no change.

Travel tour prices fell sharply, down 4.7% annually and 8.0% from February, reflecting a return to normal levels after a U.S. holiday-related surge the month prior. Airfares dropped 12.0% year over year, while gasoline prices slid 1.6% annually due to weaker global oil demand and increased supply from OPEC+.

Cellular services posted an 8.8% annual drop, largely attributed to widespread promotions that lowered plan costs.

But inflationary pressure persists elsewhere. The end of the GST/HST holiday on February 15 led to price increases for various goods and services, particularly restaurant meals, which jumped 3.2% in March after falling 1.4% in February.

BoC rate decision looms amid mixed signals

All eyes now turn to Wednesday’s Bank of Canada interest rate decision, which analysts expect to be a close call. RBC Economics suggests the central bank may introduce another 25 basis point “insurance” rate cut to buffer the economy against external shocks.

“Wednesday’s interest rate decision for the Bank of Canada will be another close call for policymakers, but we expect they will ultimately opt to add another ‘insurance’ 25 basis point cut in the face of escalating U.S. tariff risks,” RBC said in a note.

The central bank’s last meeting minutes revealed that officials would have likely held rates steady in March if not for heightened trade tensions. RBC argued that fiscal tools may be better suited to stimulate the economy under current conditions.

“We continue to think that fiscal policy is better positioned to provide the kind of timely, targeted, and temporary support needed for the economy as needed than changes in interest rates,” RBC stated.

While consumer spending has held up better than sentiment surveys would suggest, business investment and hiring expectations have weakened. RBC noted that “employment plans [have fallen] below pandemic-era lows,” and nearly one-third of businesses surveyed now anticipate a recession within the next year — up from 15% in the previous quarter.

Housing markets have also shown signs of slowing, reducing the likelihood that rate cuts will reignite overheating in the real estate sector.

“March employment data reinforced these concerns with the job count falling and unemployment rising,” RBC added.

Complicating matters further is the recent upside surprise in inflation.

“We expect March’s headline inflation will hold at 2.6% year-over-year on Tuesday, matching February’s rate with lower gasoline prices in March offset by further unwinding of the GST/HST tax holiday that ended mid-February,” RBC said. “Much of that increase outside of the drop in fuel costs is expected to show up in after-tax prices for restaurant meals.”

Regional and sectoral variations

Inflation cooled in eight provinces, with Nova Scotia the outlier—reporting a 2.3% increase, driven by rising shelter costs (+4.8%).

As the Bank of Canada prepares to make its next move, policymakers face a complex balancing act between inflation risks and growing economic uncertainty, particularly in light of global trade tensions and faltering business confidence.