The Bank of Canada could find itself well placed to cut interest rates if inflation continues to cool and the economy needs help, some economists say.

Inflation cooled to 2.3 per cent year over year in January from 2.4 per cent in December, according to Statistics Canada’s consumer price index (CPI) data released on Tuesday, and is heading toward the central bank’s two per cent target.

Here’s what economists think the numbers mean for the Canadian economy and the Bank of Canada.

‘Simply superb’: Rosenberg Research

“The Canadian CPI data were simply superb … if you are of the view that the door is still open for more Bank of Canada rate relief,” David Rosenberg, president of Rosenberg Research & Associates Inc., said in a note.

He said signs of cooling inflation were evident throughout the CPI report, including the Bank of Canada’s preferred inflation measures of CPI-trim and CPI-median, with trim slowing to 2.4 per cent year over year in January from 2.7 per cent in December — a “very big move down.”

He gave the inflation report an “A.” Seasonally adjusted, the CPI grew less than 0.1 per cent month over month, which Rosenberg said tied for the “weakest” reading since last April.

Core inflation, excluding food and energy, is running slightly above the Bank of Canada’s two per cent target on a six-month basis.

Rosenberg said that “should be a source of comfort to a central bank with a singular mandate of low and stable inflation.”

With inflation apparently slowing, he thinks disinflation is underway due to a widening output gap and a “soft” economy.

“The question emerges as to just how long the Bank of Canada is going to be able — or willing — to stay on the sidelines,” he said. “My bet is not for much longer.”

‘Benign’: Desjardins

“Consumer prices didn’t increase at all in January, further suggesting that inflationary pressures are benign in Canada,” Royce Mendes, managing director and head of macro strategy at Desjardins Group, said in a note, referring to month-over-month unadjusted inflation that came in at zero per cent.

He said the headline rate of 2.3 per cent will continue to cool over the coming months as the

GST/HST tax break on some goods works its way out of the year-over-year comparisons.

“The Bank of Canada’s preferred measures of inflation similarly pointed to muted underlying price growth,” he said, referring to the preferred core measures of mean and trim, which combined stand at 1.2 per cent on a three-month annualized basis.

He said that was the “slowest pace” for those measures since May 2020, with rents being one of the major reasons.

The largest contributor to slowing inflation was gasoline, Statistics Canada said in its release.

Mendes said the Bank of Canada has been too focused on inflation rising.

“It’s clear now that governing council should be squarely focused on supporting the economy,” he said.

Bets for an interest rate cut by mid-year rose slightly following the release of the CPI report to about 35 per cent from a bit less than 30 per cent,

Desjardins is onside with those bets, especially with a review of the

Canada-United States-Mexico Agreement nearing. “While we’re not ready to include any further rate reductions in our base case forecast just yet, it wouldn’t take much to force a change,” Mendes said.

‘Wood to chop’: BMO

“Overall, this is an encouraging result for the Bank of Canada, with inflation finally nearing the two per cent target on a broader basis,” Douglas Porter, chief economist at BMO Economics, said in a note, referring to the six-month trend in policymakers’ preferred core measures.

Inflation contracted in gasoline prices, but it also slowed in several other categories, including cellphone services, which came in at five per cent year over year in January, down from 13 per cent in December.

Porter said that alone lopped a “full tick” off headline inflation and the slowing rise in shelter costs, including rents, also helped. He said rents should continue to cool, especially given the “sharp” drop in population growth.

However, he said groceries remain “a significant thorn in the overall inflation picture.”

Inflation for food purchased at stores was 4.8 per cent. “There’s still some wood to chop on core inflation, but the shorter-term metrics are moderating noticeably,” he said.

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Porter referred to the Bank of Canada’s most recent statement that it expects to hold interest rates and that monetary policy cannot fix the structural changes the economy is undergoing due to the changing nature of the trade relationship between Canada and the U.S.

“Even so, if inflation continues to decelerate, the Bank of Canada could be in a position to support the economy should growth truly struggle as it undergoes a structural shift,” he said.