Headline inflation beat forecasts, all but ending any hope of a central bank rate reduction this month
Canada’s December inflation report offers insufficient evidence to prompt renewed interest rate cuts from the Bank of Canada, according to BMO Economics, despite mixed signals in the underlying data.
“There certainly is not enough here to push the BoC toward more cuts,” the bank's chief economist Doug Porter said in a new report published Monday. “It would take a serious deterioration in the economy and some further signs of core inflation decelerating to again open the door for renewed policy easing – we’re simply not there yet.”
The analysis follows data showing Canada’s headline inflation rate rose to 2.4% year over year in December, slightly above BMO’s forecast of 2.3%. However, BMO Economics said the details of the report present a more nuanced picture than the headline figure suggests.
The firm said special factors heavily influenced the December reading, making the month particularly difficult to interpret. Comparisons with last year’s GST holiday on restaurant meals and other goods complicated year-over-year calculations, while seasonal price movements added further distortion.
“We believe the mild core news in this report counter some of the bad news,” BMO Economics said. “While the headline rate was above expected, the details were somewhat softer, and the Bank will likely be encouraged by the pullback in most core CPI measures.”
The report said core inflation measures showed meaningful improvement. Median CPI slowed to 2.5% annually, matching its slowest pace in five years, while the trim measure declined to 2.7%. After a year of wide divergences among inflation indicators, BMO Economics noted that almost all main measures now converge around 2.5%, aligning with the Bank of Canada’s assessment of underlying inflation.
This convergence marks a shift from earlier in 2025, when various inflation measures painted conflicting pictures of price pressures in the economy.
BMO Economics expects inflation to average 2.5% in 2026, following a 2.1% increase in 2025. The outlook suggests inflation will remain relatively stable near the Bank of Canada’s target range, but not weak enough to justify policy easing.
