Canada’s Core Inflation Softness Guides Bank of Canada’s Rate Path, Says TD Securities

TD Securities analysts noted that underlying core inflation softness in Canada is guiding the Bank of Canada’s (BoC) monetary policy trajectory, reinforcing expectations for further interest rate cuts. In a research note, the firm highlighted that the recent inflation data, particularly the persistent weakness in core measures, provides the central bank with room to ease policy further without immediate inflationary pressures.

Core Inflation Trends and Policy Implications

Canada’s core inflation measures have remained subdued, with the BoC’s preferred indicators—CPI-trim and CPI-median—staying near the lower end of the central bank’s 1% to 3% control range. As of the latest data release in January 2025, CPI-trim rose 2.4% year-over-year, while CPI-median increased 2.6%, both slightly below market expectations. This softness, according to TD Securities, suggests that underlying price pressures are contained, allowing the BoC to focus on supporting economic growth.

The BoC has already cut its policy rate three times since June 2024, bringing it to 3.25% as of December. TD Securities expects further cuts in 2025, with the policy rate potentially reaching 2.5% by mid-year. The firm argues that with the economy showing signs of weakness—GDP growth stalled in the third quarter and the unemployment rate ticking up to 6.8%—the central bank will prioritize downside risks to growth over inflation concerns.

Market Reactions and Forward Guidance

Financial markets have largely priced in additional easing, with money markets implying a high probability of a rate cut at the BoC’s next meeting in March. The Canadian dollar has remained under pressure, trading near 1.44 per US dollar, reflecting both the rate differential with the US Federal Reserve and ongoing trade uncertainties.

TD Securities’ analysis aligns with the BoC’s own communications, which have emphasized that monetary policy no longer needs to be as restrictive. Governor Tiff Macklem has indicated that the central bank is closely monitoring core inflation and wage growth, but the overall trend suggests that the economy is operating below potential.

Why This Matters for Households and Businesses

For Canadian households, further rate cuts would translate into lower borrowing costs for mortgages and consumer loans, providing some relief after a period of high interest rates. Businesses, particularly those in interest-sensitive sectors like housing and manufacturing, could benefit from improved financing conditions. However, persistent core softness also signals weak demand, which may weigh on corporate revenues and hiring.

Conclusion

TD Securities’ view underscores a growing consensus that the Bank of Canada will continue to ease policy in 2025, driven by subdued core inflation and a sluggish economy. While the pace of cuts remains data-dependent, the direction is clear. For investors and consumers, this implies a period of lower rates ahead, but also highlights the underlying fragility of the Canadian economic expansion.

FAQs

Q1: What is core inflation, and why does it matter for the Bank of Canada?
Core inflation excludes volatile items like food and energy, providing a clearer picture of underlying price trends. The BoC uses core measures to assess whether inflation is sustainably returning to its 2% target, guiding its interest rate decisions.

Q2: How many rate cuts does TD Securities expect from the Bank of Canada in 2025?
TD Securities expects the BoC to cut rates further, potentially bringing the policy rate to 2.5% by mid-2025, implying additional cuts of 75 basis points from the current 3.25%.

Q3: What are the risks to the Bank of Canada’s easing path?
Key risks include a rebound in inflation due to supply chain disruptions, a weaker Canadian dollar that could import inflation, and potential fiscal policy changes. The BoC remains data-dependent and could pause if inflation surprises to the upside.