Money markets are now pricing in nearly equal odds as to whether the Bank of Canada will cut interest rates again Wednesday or keep them unchanged in the wake of a much softer than expected inflation report this morning.

Prior to the CPI data, markets were only giving a little better than one-third odds of a BoC rate cut.

Canada’s annual inflation in March slowed to 2.3%, three notches below the prior month, largely helped by lower gasoline and travel tours prices. The core measures of inflation, which are closely tracked by the Bank of Canada, however, stayed elevated, Statistics Canada said.

Analysts polled by Reuters had expected the year-on-year inflation rate to remain at 2.6%, and on a monthly basis to rise by 0.6%. On a month-on-month basis, inflation rose by 0.3%, Statscan said.

The Canadian dollar immediately fell on the data, losing its grip on the 72 cents US level, but was still well within its trading range of the past week. Shorter term Government of Canada bond yields also eased, with the two year yield down about 2 basis points. The equivalent bond yield on U.S. government debt was unchanged.

Here’s how implied probabilities of future interest rate moves stood in swaps markets moments after the inflation report, according to LSEG data. The overnight rate now resides at 2.75 per cent. While the bank moves in quarter-point increments, credit market implied rates fluctuate more fluidly and are constantly changing. Columns to the right are percentage probabilities of future rate moves.

Markets are now nearly fully pricing in two more quarter-point rate cuts over the course of this year.

And here’s what they looked like just prior to 830am CPI report.

Here’s how economists are reacting in written commentaries:

Katherine Judge, executive director and senior economist at CIBC Capital Markets

The data “still included some upwards pressure from the end of the federal tax holiday, which wasn’t fully captured in the previous month’s data. Some volatile categories were at play, with travel tours plummeting by 8% m/m after a surge in the prior month, but the Bank of Canada’s key core measures of trim and median, which strip out changes in taxes, both eased to a 0.1% m/m seasonally adjusted pace, leaving the annual rates at 2.8% and 2.9%, respectively (vs. 3.0% and 2.9% expected). Moreover, CPIX fell by 0.2% m/m and is sitting at 2.2% y/y. The easing in price pressures is consistent with the Bank of Canada cutting interest rates by 25bps at tomorrow’s meeting, with the downside risks to growth from the trade war outweighing any upside to inflation from tariffs in our view.”

Thomas Ryan, North America economist, Capital Economists

“The downward surprise to CPI inflation in March, along with the first target-consistent gains in CPI-trim and CPI-median in eight months, at the margin raise the odds of a rate cut by the Bank of Canada tomorrow. Still, with the three-month annualised pace of those averaged core measures holding uncomfortably high at 2.7%, and downside risks to the economy easing as trade tensions with the US de-escalate, we expect the Bank to keep interest rates on hold, while it waits to assess the impact of retaliatory tariffs.”

James Orlando, director and senior economist, TD Economics

“Today’s inflation report gave some reprieve from the ongoing threat of higher prices. On a three-month basis, the average of the BoC’s core inflation rates eased to 2.7%, from 3.3%, while CPI ex-food and energy came in at 2.6%. This was an encouraging development. Looking forward, April should show further easing of inflation as the elimination of the carbon tax has pushed energy prices significantly lower. That should more than offset the impact of tariffs, but not forever. While inflation is expected to remain stable over the beginning of spring, the tariff impact will start pushing inflation back towards 3% starting in May/June.

The BoC is meeting tomorrow and the likelihood of another cut has shifted dramatically over the last week. The central bank will be weighing the inflation risk from tariffs against the downside risk coming from consumer/business sentiment surveys, a loosening job market, and a very weak real estate market. We are maintaining our call for another cut from the bank, as it should take out more insurance against the mounting downside risks to the economy.”

Douglas Porter, chief economist, BMO Capital Markets

“After a couple months of high-side surprises, Canadian inflation caught a serious March break, held down by much milder travel costs than normal. This speaks to the fact that the inflation impact of the trade war is more of a two-way street for Canada than the U.S., since Canada’s tariffs are so much lighter so far, while the domestic economy is under more pressure. As well, the reversal of the Canadian dollar into firmer terrain erases one of the BoC’s inflation concerns, as it will hold back import prices. Finally, gasoline prices fell heavily on April 1 as the carbon tax was removed, and have sunk even further on the steep drop in global oil prices, paving the way for a big tumble in headline inflation a month from now. Normally, this would be a big green light for the BoC to cut tomorrow, except the small detail that their major core measures are holding close to 3% (so with the overnight rate having been slashed to 2.75%, real rates are already negative) and policymakers are operating in the dense fog of an ever-shifting trade war.”

Nick Rees, head of macro research, Monex Caanda (foreign exchange firm)

“The March inflation data undershot expectations to put a Bank of Canada rate cut this week back in play. ... We continue to think that a hold is more likely than not from the Governing Council – but after this latest data print, our conviction is somewhat reduced. This has similarly been the takeaway for markets too, with rate-cut bets accelerating, and the loonie sliding post-release. ...

Despite the market price action, however, we think the details of today’s report support a BoC hold on balance. Indeed, the headline undershoot largely stemmed from gasoline and transport costs. The former fell -1.79% MoM, in keeping with the recent slide in oil. On an annual basis, that left gasoline prices growing -1.58% in March, helped by base effects, far below the 5.10% growth rate recorded the month prior. Similarly, transport costs also notably cooled last month, dropping -0.29% over March. YoY this left prices growing 1.23%, below the 3.03% recorded in February. Crucially, this has an analogue in US data which also saw a similar dynamic. While lower fuel prices arguably play a role here, we also suspect that reduced cross-border travel is partially responsible too, limiting the significance for domestic demand. In short, we see good reason for the BoC to look through these two contributors to the headline undershoot in March.”

Tony Stillo, director of Canada economics, and Michael Davenport, senior economist, Oxford Economics

March “marked the first month of Canada’s counter-tariffs on C$60bn of US imported goods, but there were few signs that firms had passed those higher costs onto consumers. Still, with another C$35bn in Canadian retaliatory tariffs on US auto imports in effect as of April 9, we expect price increases from tariffs will begin showing up in the CPI in Q2 and build as 2025 progresses. However, headline inflation will likely drop to around 2% y/y in April thanks to the removal of the consumer carbon tax and the recent fall in global oil prices, before the US-Canada trade war drives inflation to nearly 3% y/y by the end of this year.

Today’s lower-than-expected CPI reading increases the chances that the Bank of Canada will cut rates by 25bps tomorrow. However, with rates firmly within neutral territory and plenty of uncertainty about trade and fiscal policy, we still expect the Bank to pause as it tries to balance the upside risks to inflation from tariffs against the downside risks to the economy.”

More to come