Canada’s inflation rate slowed in February, putting a potential Bank of Canada interest rate cut on the table for the summer.

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The consumer price index rose 2.8 per cent on a year-over-year basis in February, down from 2.9 per cent in January, according to Statistics Canada data released on Tuesday.

Economists had expected inflation to accelerate by 3.1 per cent, which could have further blurred where the central bank’s overnight rate was heading. Instead, the easing provides an opening for the Bank of Canada to begin discussing rate cuts, economists said.

“We’re not the only analysts caught by surprise at how modest these inflation rates of the past two months have been,” Bank of Montreal chief economist Douglas Porter said.

With this latest data in hand, Stephen Brown, deputy chief North America economist at Capital Economics Ltd., said the forecast for a cut in June is arguably now looking more likely than the 70 per cent probability currently priced into markets.

The softening in price pressures was relatively broad-based, but was most notable in grocery store prices, which rose 2.4 per cent year over year, marking the first time they rose at a slower pace than overall inflation since October 2021, and cellphone plan prices, which dropped 26.5 per cent from the year before, Statistics Canada said.

This was offset by a year-over-year increase in gasoline prices, which rose 0.8 per cent, following a four per cent decline in the prior month.

CPI core-trim and core-median, the measures the Bank of Canada is most focused on, decelerated to 3.2 per cent and 3.1 per cent, respectively, down from 3.4 per cent and 3.3 per cent in January.

Porter said the figures come as a surprise, especially in contrast to the higher and stickier readings in the United States.

The Bank of Canada in its January monetary policy report had projected inflation for the first quarter to average 3.2 per cent, but it is now headed for 2.8 per cent, he said.

“Monetary policymakers will be able to breathe a sigh of relief after seeing these numbers,” Desjardins economist Royce Mendes said, also noting that underlying price pressures were weaker than what the Bank of Canada had been estimating.

He said central bankers are expected to sound more dovish in April, thereby setting up a rate-cutting cycle beginning in June.

Yields on Government of Canada bills and bonds are rallying as markets move to price in more rate cuts, Mendes said.

CIBC Capital Markets economist Katherine Judge called the headline CPI easing compared to consensus expectation good news.

“With ample evidence that higher interest rates are working to tame inflation, the Bank of Canada is on track to start cutting interest rates in June,” she said in a note.

Leslie Preston, senior economist at TD Economics, says it may take a bit longer.

With two months of improvement in the Bank of Canada’s key core inflation gauges, she predicts the overnight rate will be left unchanged until July.

Royal Bank of Canada economist Claire Fan said she continues to expect a persistently soft economic backdrop to further slow inflation readings in the months ahead, allowing for the central bank to start lowering interest rates around mid-year.

• Email: dpaglinawan@postmedia.com

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