Making the case for a March rate cut: NBF

“The repricing is attributable to a (temporary) tariff reprieve, firmer elements in the January CPI report and surprisingly strong jobs data,” it said.

For instance, the latest inflation data for January revealed an uptick in price pressures. While the headline annual rate was still just 1.9%, this marked an increase from the previous month, and the details of the data pointed to some underlying signs of inflation.

At the same time, the latest jobs data from Statistics Canada, which was headlined by 76,000 net new jobs in January, also points to a robust labour market.

“Naturally, these developments leave forecasts for a 25 [basis point] cut next month on shakier footing but there are still some compelling reasons to expect a cut,” NBF said.

On inflation, the Bank of Canada has signalled that it’s focused on “inflation breadth on a 12-month basis,” it said. “Viewing inflation through this lens, January’s report doesn’t change much.”

As for labour market strength, NBF noted that while the headline jobs numbers were strong, other labour market indicators are not so rosy. 

“Hiring intentions remain below historical averages, the job vacancy rate is at a seven-year low and other employment data is signalling the opposite of [StatCan’s labour force survey],” it said.

Overall, this data shouldn’t be as large of a barrier to a rate cut as the market currently expects, it said. 

“That’s because economic slack remains in Canada, and it may grow further as geopolitical uncertainty weighs,” it said. 

Already, GDP forecasts have been trimmed, amid the prospect of further trade disruption.

Indeed, the threat of higher tariffs is weighing on business activity, the report said, noting that recent business survey data revealed that some firms have delayed investment due to the heightened trade uncertainty, and others are “delaying or cancelling expansion plans and/or reducing their workforce (or at least considering it).”  

Households are being impacted too, it said, noting that recent weakness in housing resale activity has been tied to trade-related uncertainty.

“Simply put, there remains a case for an ‘insurance cut’, allowing policymakers to cushion the blow of tariff uncertainty and potentially, tariffs themselves,” NBF said. 

The report acknowledged that the central bank would have to change its tune if more convincing evidence of inflation, economic strength, and labour market robustness turns up. But “for now, the BoC leans dovish, likely to err on the side of accommodation under uncertainty,” it said. “We’re not convinced recent data have completely upended that, especially since uncertainty may snuff out any nascent economic recovery.”