The consumer price index data for March published on Tuesday showed a respite from inflationary pressures in Canada, with annual inflation coming in 0.4% below consensus expectations in March, noted National Bank of Canada.

The end of the GST holiday had an upward impact on prices this month. Excluding indirect taxes, prices fell by 0.4% after seasonal adjustment, the most pronounced decline since April 2020 when the economy was put on hold due to the pandemic.

There are certainly some specific factors that explain this weakness, namely travel tours, airfares and cellular services prices. However, the measures favored by the Bank of Canada were also weak in March, which testifies to the generalized nature of the weakness, stated the bank. The CPI-Trim and the CPI-Median increased at a rate of only 0.14%, their lowest rate in 13 months.

On a three-month annualized basis, both measures are back in the BoC target range (1.0% to 3.0%), increasing respectively at 2.7% and 2.8%. The last few months had been surprising as inflationary pressures rapidly intensified with an economic upturn despite numerous signs of an economy that remained in excess capacity, pointed out National Bank.

Indeed, a small proportion of companies continued to claim that they wouldn't be able to meet additional demand or were experiencing labor shortages. In this sense, a return to more moderate inflationary pressures isn't surprising, especially as several economic indicators began to show weakness, including the labor market in March, added the bank.

Given the United States tariff uncertainties that are paralysing several companies and are likely to lead to further weakness, National Bank reiterates that the upsurge in inflation was temporary, especially since the Canadian government doesn't seem inclined to implement strong retaliatory tariffs.

In such a context, the Bank of Canada should be in a position to further deliver interest rate cuts this year -- key rate forecast at 2.0% at the end of the year.