The Global Week Ahead: Turning Points

Next Week's Risk Dashboard

• Canada election call, fast policy action likely
• Canada delivers carbon tax relief on energy bills…
• …but it may not be a boon to most households
• Canadian CPI to begin a trio of highly distorted reports
• Why the BoC is unlikely to cut again in April
• FOMC to hold, lean a little closer toward stagflation risk
• BoJ is unlikely to rush a hike
• BoE to hold, stick to “gradual and careful” guidance
• UK labour market conditions to be refreshed just before the BoE
• SNB likely to cut as it continues to fight CHF strength
• US retail sales may rebound
• Canadian retail sales may reverse some of the surge
• US manufacturers likely to escalate tariff concerns
• Three more Canadian provinces to issue budgets
• Will Australia’s jobs miracle continue?
• BCCh may balance the risks as the peso gains
• BI likely to hold amid rupiah volatility
• CBCT to hold on Taiwan dollar concerns
• BCB to hike another 100bps
• SARB expected to hold amid budget fracas
• Russia’s central bank to maintain tight policy
• Will Sweden’s Riksbank nix its final cut?

Chart of the Week

Seriously? This is what is meant by central bank coordination?!

No fewer than eleven global central banks will weigh in with policy updates this week including three of the most powerful ones such as the Federal Reserve, Bank of Japan and the Bank of England. Many of them are expected to have less confidence in the path forward and partly because of you-know-who over on Pennsylvania Avenue. What they guided could dominate the week’s market actions and possibly—just possibly—give crazy social media rants a run for their money for a change.

There will also be a bunch of top-level global indicators to consider. I’ll explain thinking around Canadian inflation not just for this week’s February update but also the following two reports and how they may muddy the waters for the Bank of Canada. US and Canadian retail sales, the state of UK and Australian job markets, and a select number of global GDP readings are also due out.

CANADIAN POLICY ACTION IS MOVING TOWARD AN ELECTION CALL

Keep a particular eye on Canada this week. Speculation is aimed at a potential election call at any moment. Freshly minted PM Mark Carney said at the end of this past week “There will be other news in the coming days with respect to ensuring that we have as strong a mandate that is needed for the time.” For a PM who is used to speaking in the language of central bankers, that’s about as close to saying expect an election call as it may get.

Charts 1–2 provide updated polling and seat mapping as the revamped Liberals close in on the Conservatives.

Carney has already—as of this past Friday afternoon—removed the consumer portion of the carbon tax effective immediately while allowing for one final carbon tax rebate cheque in April. Expect gasoline prices and home heating costs to begin falling soon. I go over the implications for Canadian inflation below.

The smaller cabinet of 24 ministers isn’t quite as small as had been speculated but is a far cry from the bloat that previously existed with 37 cabinet ministers. I would expect this atrophy to extend to the civil service through leading by example at the highest executive levels of government.

The Federal civil service exploded under PM Trudeau (chart 3) with the biggest areas of expansion shown in chart 4. Applying the usual population factor in comparing the US and Canada would turn the almost 370k Canadian federal civil servants into a figure almost 50% larger than the size of the federal civil service in the US. Canada is a more sparsely populated and huge country that makes delivery of services more difficult, but probably not 50% more difficult. Layer on the combined explosion of civil servants across all levels of government across the country (chart 5) and the massive expansion of public sector jobs not limited to civil servants (chart 6) and the outcome is ripe for some trimming. This debate long pre-dated DOGE in the US, just in case there is temptation to interpret Canadian developments through an American-centric lens.

Rapid movement on trade strategies is also expected with the Canadian side reporting progress. Carney will head off to Europe this week to draw on his extensive network of contacts in the UK and France with the main aim likely to be to round up coordinated support against US trade bullying. Carney may have his first call with President Trump, but an in-person meeting is likely quite some time away. Readers can say what they wish about outgoing PM Trudeau, but I give his administration high marks for handling US trade bullying in 2018 and recently and expect that to continue under PM Carney.

Also watch for guidance on tearing down interprovincial trade barriers, procurement plans, defence spending initiatives in addition to order warplanes, and broad infrastructure goals.

CANADIAN INFLATION—A WILD THREE-MONTH RIDE COULD MERIT BOC CAUTION

Canada updates CPI inflation figures for February on Tuesday. The overall reading is expected to jump sharply higher, but key will be the details.

Several forces may combine to put significant upward pressure on Canadian inflation over the next two reports but with the one after that potentially being a weaker one. In theory, the panoply of one-off distortions should have the BoC looking through their effects, but inflation is likely to be highly volatile through this period, thereby reducing the BoC’s confidence toward reading the tea leaves and probably resulting in a cautious bias.

February CPI to Start Reversing the GST/HST Cut

I’ve estimated total CPI in February will increase by 1.1% m/m on a seasonally unadjusted basis as per the polling convention. That could translate into a seasonally adjusted rise of about 0.9% m/m using the pattern of recently higher than usual seasonal adjustment factors for months of February. The year-over-year rate should rise to about 2.7%.

One key driver is that the temporary cut in the Goods and Services Tax and the HST (in provinces that have one) expired on Saturday February 15^th. Statcan will capture this effect for about half of the month, which means that CPI should get a 0.4% lift from the tax effect. That’s symmetrical to the estimated impact of the mid-December GST/HST cut as measured by the spread between the change in CPI excluding the effects of changes in indirect taxes and the overall CPI index that month (chart 7).

Another key driver behind the unadjusted estimate is that February is normally a strong up-month for prices in Canada. If you’ve been here in February, then that needs little to no further explanation. If not, then it’s a time of year when retailers optimistically begin rolling out Spring lines on the expectation that Canadians will be in a rush to snap up new bathing suits and sundry other less weighty accoutrements, and so February’s core CPI often rises by 0.6% to 0.8% m/m NSA. Major drivers typically include clothing and footwear prices plus the recreation, education and reading category. Gasoline prices were also a bit higher in February.

And when it comes to seasonal adjustments, chart 8 shows that the pandemic-era has seen the highest SA factors for like months of February on record which, assuming it continues this time, is likely to inflate the seasonally adjusted change.

Key, however, will be the Bank of Canada’s preferred core measures of inflation—trimmed mean CPI and weighted median CPI that have been running at an elevated rate (chart 9). They exclude the direct effects of changes in sales taxes and so the end of the GST/HST cut shouldn’t be the same driver that it is expected to be for headline CPI. 

The core measures do not, however, exclude the indirect incidence effects of tax changes that are difficult to estimate. Key will be whether retailers, restaurants and bars and other consumer spending sectors shrink margins and prices to offset the tax increase, preserve margins they appeared to have padded when the tax was temporarily cut, or continue to raise core prices in keeping with the pattern over recent months. That boils down to an empirical question for which we lack adequate data to assess until we see the actual numbers and then any revisions.

March CPI to Build Upon Inflationary Pressures

March CPI is likely to build upon such pressures through four combined effects.

One is that the other half of the reversal of the GST/HST cut will raise CPI by 0.4% m/m NSA through just that effect.

March also tends to be an up-month for seasonally unadjusted prices.

The other effect is that we may begin to see the pass through of retaliatory tariffs into CPI. The first effects will come from the $30B of imports from the US that are targeted with a 25% tariff starting on March 3^rd, plus the extra roughly $30B of US imports targeted for a 25% tariff starting on March 13^th.

That’s no easy task, but it could add several tenths of further upward pressure on overall CPI. Some tariffs apply to business inputs with uncertain pass through, and some apply directly to consumer goods in CPI. How much of the tariff hike is passed through and when are uncertain, but the BoC’s recent survey indicates that about half of businesses intend to pass through tariffs into higher prices, and the largest fraction of respondents within that 50% indicates they will pass on over 90% of the tariff hike (chart 10).

All tallied, March CPI would have been inching closer toward 2¾% or higher if not for this next effect.

April CPI to Capture Full Effect of the Carbon Tax Cancellation

PM Carney has already eliminated the consumer portion of the carbon tax as of this past Friday. This will begin to be a downward influence upon March CPI but with the complete effect captured in April’s CPI reading as I’ll explain. Also see toward the end of this publication an explanation of why the elimination of the carbon tax may not be a boon to most households depending upon how rebates are handled in future.

This move heads off the next hike on April 1^st, when the carbon tax was slated to rise from C$152.50 per 10³m³ to $181.1 or by nearly 19%. Past increases quickly showed up in gasoline prices (chart 11) and the estimated impact of the carbon tax on gasoline prices is presently about 18 cents per litre but would have risen to about 21 cents a litre if the coming hike had not been abandoned (here). This thwarted carbon tax increase could have contributed around ½% m/m CPI on top of seasonal pressures and whatever other drivers emerge once we start to get more information on April prices. 

Instead, and as a consequence to the carbon tax cancellation, gasoline prices could drop by up to 18 cents per litre assuming that all of the removal of the tax happens rapidly and flows through after-tax prices versus being absorbed by retail and upstream margins. If that happens, then the 4.1% CPI weight on gasoline applied to this roughly 12% drop in the price of a litre of gasoline could subtract 0.5 ppts from m/m CPI in total over March and April with probably roughly -0.2% effects in each month.

That’s headline CPI. Core CPI measures could also be a little softer if lower gas taxes get passed along in various goods and services that use gasoline. Think of lawn cutters, transportation services etc.

And the effects of the carbon tax removal don’t stop at gasoline prices. The impact on various energy prices is available here including what had been the planned increases.

Now for the punchline. March CPI lands on April 15^th—one day before the next BoC policy decision. If CPI spikes through this combination of direct and indirect effects of tariffs, GST/HST reversals, seasonal effects, underlying residual pressures on inflation, and the carbon tax removal, then the optics of cutting the day after may be a bit much for the BoC to accept.

Normally, a central bank would seek to look through several of these one-off effects. The debate, however, is around how they all net out through incidence effects and what impact they have upon inflation expectations. The BoC may wish to wait and see, pending other developments that we’ll evaluate as they roll in.

FOMC—EXTENDED PATIENCE

Wednesday afternoon brings out the FOMC’s latest policy decision plus revised forecasts and guidance. No policy changes are expected at this meeting. A need for patience is likely to continue to dominate overall messaging. Scotiabank Economics expects the FOMC to remain on hold over at least the next two meetings into Q3.

Alongside the 2pmET statement, most of the attention will be placed upon the updated Summary of Economic projections including the so-called dot plot of policy rate projections by individual FOMC members, plus Chair Powell’s press conference at 2:30pmET.

Nobody expects a policy rate change at this meeting. The FOMC officials have been very clear that they will remain patient as they assess incoming data plus the evolution of policy measures introduced by the Trump administration.

Growth projections probably have to be cut given the way the year is starting off and the impact this will have on full-year math that influences the convention of forecasting GDP growth on a Q4/Q4 basis. The SEP has impure motives and the Committee may wish to err on the side of being conservative, but it’s likely that 2025 growth will be significantly marked down from 2.1% in the December SEP.

Core PCE inflation could still land around 2½% as in their last projection but is more vulnerable to being marked up a few tenths than down. If not, then I would still expect the press conference to emphasize upside risks to inflation. Also disconcerting to the FOMC is that measures of inflation expectations remain high and rising (charts 12, 13).

Why raise projected inflation beyond the risk that rising inflation expectations become self-fulfilling? The thesis I’ve had for a long time now remains that the US economy continues to operate in excess aggregate demand (chart 14) that can drive persistence of inflationary pressures. The next illustration of this point is likely to be February’s core PCE reading on March 28^th that should be up by the generous side of 0.3% m/m SA that would remain just shy of 4% when annualized. Further, the harm that Trump’s policies are doing to confidence to invest is curtailing supply-side expansion and so is tighter immigration policy. Tariffs pose passthrough risks into core inflation especially in an economy in excess demand. Fiscal measures are delayed as the GOP argues internally over the appropriate net path ahead, and the balance between regulatory easing on the demand and supply sides of the economy remains to be determined.

Little change is expected for the unemployment rate projections at 4.3–4.4%.

But the key will come down to how all of this translates into the Committee’s guidance on future rate changes. The Committee had already marked down projected easing this year in its December projections, from 100bps to just 50bps followed by another 50bps in 2026 and one more cut in 2017 toward a long-run neutral rate of 3%.

The Committee may well just leave it at that and reassess in the June projections. Standing by that earlier projection would be a touch more hawkish than markets are presently pricing as they are on the fence between 50–75bps of cuts this year. Upside risk to inflation would merit reducing projected easing. If the Committee felt that a significant and prolonged recession beckoned, then the impact upon reducing excess demand could merit more easing and yet it’s highly unlikely that the Committee will have the confidence to make that call at this point especially if the outcome leans toward stagflation.

Given the enormous uncertainty surrounding the volatile Trump administration’s policy measures, both present and future, the best course of action for the FOMC would be to stand firm against changing much of anything for a while and to reassess after multiple rounds of data and policy developments.

BANK OF JAPAN—NO RUSH TO HIKE

The Bank of Japan is expected to leave its target rate unchanged at 0.5% on Wednesday. Key will be guidance that is provided in relation to market expectations there may not be another rate hike for some time. Half of a 25bps hike is priced for the June meeting, but a full hike is not priced until the October meeting.

Japan continues to make headway toward wage-driven achievement of the BoJ’s 2% inflation target. Rengo—the dominant trade union—just secured a 5.5% average wage gain for its members in the annual Shunto round of wage negotiations. That is a new high over the past 3+ decades (chart 15). The hike, however, only influences about one-fifth of workers and so greater pass through into broader wage growth is still needed especially in the context of soft inflation-adjusted average earnings growth (chart 16).

Where the rub lies may be in terms of how the BoJ views other drivers of inflation. The yen’s appreciation so far this year from about 158 to the dollar to 148 now lessens confidence that import price inflation will persist. So does the decline in global oil prices, including WTI that is about $10/barrel cheaper than in January.

We may hear Governor Ueda continue to indicate a preference for evaluating US policy and growth risks. Like the Fed itself, that’s probably going to take a while yet. The next chance at a fuller reassessment will come at the May 1^st meeting when the BoJ will present fresh forecasts compared to what are now getting to be increasingly stale projections from late January.

BANK OF ENGLAND—IN BETWEEN CUTS

The Bank of England is expected to remain on hold on Thursday if for no other reason than an extension of the cut-hold-cut oscillating pattern since the BoE began easing last July.

Key will be whether they reinforce market pricing toward a cut at the next meeting on May 8^th. That is when the BoE will issue its next Monetary Policy Report including updated projections to the last forecasts that were issued back on February 6^th.

The bias is likely to lean that way with communications reinforcing that “a gradual and careful approach to the further withdrawal of monetary policy restraint is appropriate.”

For now, wage growth remains too warm (chart 17) and January’s core inflation was a weaker seasonally unadjusted drop than normal (chart 18).

Bailey recently indicated they expect a pick-up in inflation this year, but asked “is this going to have second-round effects or not?” to which he responded “set against a weakening pattern of the economy, probably less likely.”

OTHER CENTRAL BANKS

A slew of other central banks will also weigh in alongside the three most influential that have been covered. Here are expectations in chronological order.

Bank Indonesia—Likely to Hold

Wednesday’s decision faces a somewhat divided consensus. Most expect the policy rate to stay at 5.75%, but a significant minority thinks there could be a 25bps cut.

What may carry the day is the fact that the rupiah has continued to depreciate so far this year, though at a slower pace than last year’s slide. Further, Indonesia’s headline inflation is very soft at -0.1% y/y due to a one-off cut in electricity rates, but core inflation moved up to 2½%.

CBCT—Taiwan Dollar Concerns to Dominate

No change is expected for Taiwan’s central bank rate on Thursday as an extension of the hold since last March. Recent weakening of the Taiwan dollar is likely to trade off against a softer than expected February inflation report that saw inflation fall back to 1.6% y/y with core at about 1%. Governor Yang Chin-long recently warned, however, that “Together with Trump 2.0-induced uncertainties, concentrated and massive short-term foreign capital flows bring challenges to the stability of our foreign exchange market.” Accordingly, CBCT is unlikely to do anything that would risk rocking the boat further.

BCB—Will it Signal Downshifting?

Banco Sentral do Brasil’s decision on Wednesday is an easy one. The central bank continues to hold forecasters’ hands with explicit forward rate guidance. The last time it hiked by 100bps on January 29^th, BCB said “In light of the continuation of the adverse scenario for inflation convergence, the Committee anticipates another adjustment of the same magnitude in the next meeting, if the scenario evolves as expected.” Since then, inflation has crossed above 5% y/y and inflation expectations remain elevated (chart 19).

Guidance at this meeting may not repeat this expectation for the next decision on May 7^th. That’s because the January decision sounded more data dependent beyond March, partly as the lagging effects of what will be a cumulative 325bps of hikes since September work through the economy.

SNB—Another Step to the Lower Bound

Thursday’s decision by the Swiss National Bank is expected to deliver another 25bps policy rate cut. This will be the fifth rate cut since easing began from a 1.75% policy rate peak last March.

The Swiss franc’s stubborn strength so far this year is an ongoing catalyst for further easing. So is the fact that core inflation is running under 1% y/y with headline inflation just over 0% y/y.

President Schlegel has indicated that inflation is expected to remain within the target range over the next three years. He did not rule out a return to negative rates that “fulfilled their most important purpose, namely to make the Swiss franc less attractive compared to other currencies and thus ensure price stability.”

Riksbank—Will They Nix the Last Cut?

Thursday’s decision is widely expected to keep the policy rate unchanged at 2.25% across both consensus and market pricing. Fresh forecasts and explicit forward rate guidance are expected at this meeting. The prior decision in January indicated one more cut over 2025H1 and then a prolonged hold.

Markets are presently pricing no further cuts. One reason for this is that inflation has begun turning upward again (chart 20).

SARB—Budget Tiff Adds a Domestic Twist to Trade Tensions

Consensus is divided on what the South African Reserve Bank may do on Thursday. A majority expects a hold at a repo rate of 7.5% with a sizeable minority expecting a cut. The dominant hold camp believes that the central bank will sit out developments in global trade tensions and a national budget debate for now.

BCCh—The Peso’s Turn May Balance the Risks

Friday’s decision by Banco Central de Chile is widely expected to keep the overnight rate unchanged at 5% as an extension of the holding pattern since December.

The last hold back on January 28^th expressed concern about upside risks to inflation not least of which due to peso depreciation. That has since reversed as the peso is up by about 7% to the dollar so far this year.

Russia CB—Inflation to Keep Policy Tight

Russia’s central bank is expected to keep its key rate unchanged at 21% on Friday. Any hope that policy easing could commence in the near term was likely thwarted by a further upward move in inflation. February’s CPI move up to just over 10% y/y and core inflation crossed 9 ½% y/y.

GLOBAL MACRO

The rest of the global line-up is included in chart 21. Key indicators are summarized below.

The key US release this week will be retail sales in February (Monday). A decent rise is expected on the back of a 2.5% m/m SA rise in vehicle sales and following weakness in January that was partly driven by worse than usual weather but also by LA’s fires. Some of those effects are likely to persist in February.

Canada also releases housing starts for February that are expected to jump based on higher permit volumes. Retail sales for January (Friday) were previously guided by Statcan to have slipped by 0.4% m/m, albeit after the large 2.5% rise in December.

Other US releases will be focused upon housing and the industrial sector. Housing starts might post somewhat of a rebound from the roughly 10% drop in January (Tuesday). Industrial production could continue to benefit from higher utilities output given harsh weather. The Empire (Monday) and Philly (Thursday) manufacturing surveys from the Federal Reserve’s district banks could continue to highlight difficulties dealing with tariff uncertainties. Existing home sales in February are expected to fall based on weaker pending home sales (Thursday).

Australia’s job market has been on a tear for a persistent period. February’s update (Wednesday) will be watched by RBA observers to see if an eleventh straight gain is recorded as consensus expects.

UK jobs, wages and jobless claims for the combined months of January and February (Thursday) will be updated just before the Bank of England’s expected hold.

Five countries will issue GDP and GDP-proxy reports starting with Brazil’s economic activity index for January (Monday), Colombia’s on Tuesday, Chilean Q4 GDP on Tuesday, and then New Zealand’s Q4 figures that may post a mild rebound from Q4 contraction (Wednesday) and Argentina’s economy that is expected to register mild growth (Wednesday).

THREE MORE CANADIAN PROVINCIAL BUDGETS

Provincial government budget season continues next week with releases by New Brunswick (Mar 18), Saskatchewan (March 19), and Manitoba (March 20). Scotia’s Mitch Villeneuve argues that, in line with other provincial budgets released to date, he expects some deteriorations in their fiscal outlooks due to downgraded economic outlooks and/or increased amounts set aside to absorb potential tariff war-related impacts. All three provinces go into this budget season with fairly stable debt burdens, which position them well to withstand a period of potential fiscal turbulence—especially Saskatchewan and New Brunswick, which have lower existing debt levels (chart 22). In the three provincial budgets released so far this Spring (Nova Scotia, Alberta, and BC), the respective governments have set aside an average of 0.4% of GDP in extra contingencies in each of the next two fiscal years (chart 23)—representing (so far) roughly $8 billion in potential extra annual issuance. 

WIPING OUT THE CANADIAN CARBON TAX MAY NOT BE A BOON TO MOST HOUSEHOLDS

At issue with the elimination of the Canadian government’s consumer carbon tax is how the government may attempt to replace household income losses for those that had been in a net-positive position. Scotia’s Rebekah Young shares her thoughts on the matter.

The federal fuel tax (or "carbon tax") was designed to be net-neutral fiscally as proceeds from the federal fuel charge are returned to households (e.g., the "carbon rebate”) on a progressive basis according to household income. This consumer tax is expected to raise $14.7 bn this year (FY25) and would have risen to an estimated $21.7 bn by FY30 (the charge stood at $80 per tonne in 2024 and was expected to rise by $10 per year through 2030). The PBO estimates the average household in backstop provinces sees a net gain in direct fiscal impacts (i.e., rebate received less fuel charge paid). If the current or future government were to aim to keep those households whole (i.e., only households that receive more than they pay were to receive an equivalent transfer via other measures), this could translate into a $16.7 bn fiscal cost (5-yr) based on 2024 fuel charge level. If the intent was to replace hypothetical net gains in future years had the charge continued to rise, the fiscal cost could be closer to $29 bn. Both leading parties heading into the next federal election have promised tax cuts. This could provide a benchmark for eventual sizing of future tax cuts. Assuming any future tax cuts or transfers were income-tested, they would likely be largely neutral from a fiscal impulse or average household income perspective but would carry a fiscal cost for the government. Watch for further potential announcements on how to address these issues into an election campaign.