Posthaste: What Mark Carney's gas tax cut could mean for the Bank of Canada
Temporarily eliminating the federal excise tax on gasoline has the potential to lower the temperature on inflation expectations and take some pressure off the Bank of Canada , one economist says.
“At the end of the day, if gas prices are lower than they would be otherwise, that means inflation expectations are likely to be slightly lower than they would be otherwise,” Randall Bartlett, deputy chief economist at Desjardins Group, said. “Certainly, all of this together does help to take some pressure off the Bank of Canada.”
Prime Minister Mark Carney on Tuesday said it is suspending the tax on regular gasoline, diesel and aviation fuel from April 20 to Sept. 7, saving people 10 cents per litre on regular gas and four cents on diesel.
The Bank of Canada is bracing for a potential inflation wave from the conflict in the Middle East. Iran shut down the Strait of Hormuz , the passageway for 20 per cent of the world’s oil and gas needs, which has pushed up prices at Canadian gas pumps by an average of 35 per cent since the start of the war on Feb. 28.
Overall inflation in February came in under the Bank of Canada’s two per cent target, according to the consumer price index (CPI) report. But many economists are predicting it will spike in the months ahead to as high as three per cent on elevated energy prices and the rising cost of other commodities affected by the strait’s closure.
Nevertheless, most economists think the central bank will keep interest rates at their current level of 2.25 per cent because the Canadian economy is carrying lots of slack. But markets, through the use of overnight swaps, are betting the latest inflation threat will force the Bank of Canada to hike rates two times this year.
Complicating matters is that the United States-Iran conflict is ever-changing. Oil prices rose on Monday after the U.S. blockaded Iranian ports in the Strait of Hormuz, but then fell on Tuesday on the news of possible fresh talks between the two sides.
Tax cuts aside, how much pressure will be on the Bank of Canada also depends on how long the war lasts, how long energy prices remain elevated and by how much they seep into inflation expectations.
Bartlett said five-year consumer inflation expectations remained “well-tethered” to earlier levels in the post-pandemic period when the CPI accelerated to eight per cent year over year. However, shorter-term inflation expectations spiked well above their pre-COVID-19 trends, according to data from the Bank of Canada and Haver Analytics Inc.
Food and energy costs are the two areas that factor most into consumers’ inflation expectations, Ali Jaffery, chief economist at KPMG Canada, said, but the Bank of Canada puts “a lot more weight” on where businesses think inflation is headed.
Further muddying the outlook for the Bank of Canada is that the Canada-U.S.-Mexico Agreement (CUSMA) review starts in July.
Desjardins economist Tiago Figueiredo said in a note on Tuesday that the removal of the gas tax will reduce overall inflation by an estimated 0.2 percentage points, but it likely wouldn’t affect the April CPI data given the late start date.
He also said the tax’s temporary elimination won’t factor into the measures of inflation that the Bank of Canada follows — core median and core trim — since they strip out tax policy changes.
Nonetheless, Bartlett said the tax’s elimination will give the Bank of Canada a leg up when it comes to communications and inflation expectations.
“On net, it leaves the Bank of Canada better positioned to leave rates on hold until after it gets more information on the CUSMA review,” Bartlett said.
Spring is traditionally the busiest time for real estate and this year, the stakes couldn’t be higher. Follow our Spring Real Estate Survival Guide series as we unpack some of the most pressing questions buyers and sellers are grappling with, plus expert advice on how to navigate the reality of a slower market. Read the series here
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Oil markets have experienced sharp and often disorienting swings since the war in the Middle East started just over a month ago. Prices surged as tensions escalated into a shutdown of the Strait of Hormuz, a chokepoint that handles a meaningful share of global oil flows. Prices then partially reversed just as quickly on even the smallest hint of de‑escalation or a possible ceasefire. The result has been a market driven less by steady analysis and more by a speculation of outcomes and rapidly shifting probabilities that can change overnight. — Martin Pelletier, Financial Post columnist
Read his full column here.
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Today’s Posthaste was written by Gigi Suhanic with additional reporting from Financial Post staff and Bloomberg.
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