Published in The Globe and Mail.
The Bank of Canada held its policy rate constant at 2.25 per cent on Wednesday, meeting market expectations. This was in spite of headline inflation increasing to 2.8 per cent in April, up from 2.4 per cent in March, near the upper end of the central bank’s 1 to 3 per cent control range. The combination of muted price pressures beyond gasoline, and economic weakness in the form of essentially zero economic growth in the first quarter of this year contributed to the decision to hold – which we think was the correct one.
The harder question is where the bank goes from here. Will inflation spread to more sectors, forcing interest rates up? Despite encouraging April labour data, will economic weakness continue to keep rates low as we face structural challenges and the upcoming review of the United States-Mexico-Canada Agreement? Or will the bank keep the policy rate where it is and reassess the economy’s potential after we get greater clarity around these major events?
We admit to being torn, as some of the key underlying inflationary measures that the bank uses seem to be pointing in different directions. Some suggest headline inflation – which is what the Bank of Canada actually targets – will move back toward the 2-per-cent target, while other measures of inflation signal a continued rise in headline inflation. Let’s unpack the details.
The spike in headline inflation in April was driven mainly by gasoline prices, which increased by 28.6 per cent year over year. Inflation for all items excluding gasoline was 2 per cent, exactly equal to the target rate of inflation. The main driver of gasoline prices was, of course, the war in Iran, which pushed up global oil prices. The removal of the consumer carbon levy on April 1, 2025, led to a decrease in gasoline prices that month, making the year-over-year increase in those prices even larger.
Gasoline prices are traditionally among the most volatile components of the consumer price index, so they are excluded from the bank’s measures of core inflation, which by construction exclude volatile components. CPI-trim and CPI-median inflation, currently the core measures most favoured by the bank, moved down to 2 per cent and 2.1 per cent in April, down from 2.2 per cent and 2.3 per cent in March, respectively.
Previously favoured measures of core inflation, including the CPIX, which excludes gasoline along with fruit, vegetables, fuel oil, natural gas, mortgage interest, intercity transportation, tobacco products and the effects of indirect taxes, moved down to 2.1 per cent in April, from 2.5 per cent in March.
The core measures are designed to measure underlying inflation and to give an idea of where headline inflation is headed over the short to medium term. Moderating core inflation should be a predictor of moderating headline inflation. That gives the bank room to leave the overnight rate target as is before it might have to lower it to prevent the downward drift in inflation from overshooting the 2 per cent target.
If the trade negotiations with the United States and Mexico fall through, leading to weaker exports and employment, the bank may even have to lower the policy rate sooner.
But the industrial product price index and the raw materials price index for April were considerably less rosy. These measures matter because they capture the input costs facing producers, and sooner or later, they are passed on to consumers.
The industrial index increased 11.4 per cent year over year, while the raw materials index increased by a whopping 31.6 per cent year over year. Both increases were largely because of the impact of the war. The last time the industrial index posted double-digit growth was the stretch from March, 2021 to August, 2022, when consumer price inflation accelerated from just above the target to a peak of 8.1 per cent in June, 2022.
These price increases will propagate through the supply chain. The big unknown, then, is the geopolitics of the war in Iran. An actual agreement between the United States and Iran could lead to the reopening of the Strait of Hormuz with the prospect of restoring supplies of petroleum, natural gas, fertilizer and other important commodities, helping lower input prices. Without an agreement, input prices could continue to increase.
The bottom line is that uncertainty remains high, and the Bank of Canada is faced with weighing the importance of contradictory signals about future price movements. For now, holding was the right call.
Jeremy Kronick is president and chief executive of the C.D. Howe Institute, where Steve Ambler, a professor of economics at Université du Québec à Montréal, is the David Dodge Chair in Monetary Policy.