The Bank of Canada is expected to ease rates further on Wednesday but experts question whether the rate cycle is getting ahead of itself
As the Bank of Canada (BoC) heads into its final two policy meetings of 2025, investment experts and economists are nearly unanimous in their expectations: another rate cut is coming.
But while consensus points to a 25-basis-point reduction this week, some economists remain unsure it’s the right move, highlighting diverging interpretations of the current economic landscape and the risks tied to Canada’s inflation trajectory.
BeiChen Lin, senior investment strategist and head of Canadian strategy at Russell Investments, expects a cut this week, citing ongoing labour market weakness and a slowing economy. Lin also sees Canada as more vulnerable to recession than the US, due to both higher household debt levels and more persistent labour market weakness. He pointed to rising unemployment and shrinking GDP in Q2 as indicators of a softening backdrop.
“If we are in a world where the Bank of Canada is able to avoid a recession, then I think you’re going to see interest rates probably settle at around two per cent until the labour market starts to heal,” said Lin.
He sees a tale of two economies unfolding on either side of the border, with the US showing continued strength while Canada faces mounting fragility. US GDP grew by nearly 4 per cent in the second quarter and is expected to show similar strength in Q3, according to the Atlanta Fed’s model, he said.
Despite a modest uptick in unemployment to 4.3 per cent, Lin views the labour market as largely stable. Meanwhile, the S&P 500 is on pace for a fourth straight quarter of double-digit earnings growth.
Against that backdrop, he sees the Federal Reserve continuing its cautious rate-cutting strategy. Inflation, while still slightly above the two per cent target, is expected to cool further over time, adding that the impact of recent tariffs will likely be temporary.
Lin expects another 25-basis-point cut this week and suggests the Fed may front-load easing to mitigate the risk of an unexpected labour market slowdown. He calls it a “risk management exercise” aimed at preserving the soft-landing narrative.
Meanwhile, Jonathan Lachaine, senior economist at Addenda Capital, isn't convinced the labour market story justifies further easing as he argues Canada is wrestling with three simultaneous shocks: a negative foreign‑demand hit from tariffs that dented exports, still‑robust domestic consumption and balance‑sheet strength supporting demand, and a negative supply/productivity shock that pushes up prices.
That mix, plus a policy rate already around neutral while inflation runs near three per cent, means restarting an aggressive easing cycle risks reigniting inflation pressures, precisely why he’s been urging more caution.
Additionally, the unemployment rate has climbed from under five per cent to 7.1 per cent, and GDP contracted in the second quarter. Lin noted that the Bank of Canada has already cut rates more aggressively than the Fed, bringing the policy rate down to 2.5 per cent in September, below the estimated neutral rate of 2.75 per cent. Despite this, “the Bank of Canada needs to do further easing,” he said, pointing to deteriorating labour conditions and weak business sentiment.
“The cutting pace has been the fastest in all advanced economies,” added Lachaine, pointing to persistent wage growth and stagnant productivity as key risks. That easing, he argues, helped push core inflation measures back above three per cent. He also warns further cuts could risk reigniting inflation pressures before they’re fully under control.
Lachaine also pointed to the issue with the theoretical underpinnings of the Bank’s approach, particularly its reliance on output gap models. He questions how the Bank is calculating potential output, particularly in the context of a recent immigration surge that may not be contributing to the labour supply as quickly as assumed.
After all, integrating newcomers into the workforce takes time, he argued, and in the meantime, they contribute more to demand than supply, which creates short-term inflationary pressures - especially in essentials like housing.
“The increase in the unemployment rate was much more gradual, and wage growth was steady at a very high level. For us, the labour market was actually inflationary because Canada workers are being paid above what they can bring to the table,” he said.
He sees this as a key policy error. By overestimating productive capacity and cutting rates too aggressively, Lachaine argues the Bank stoked a reflationary environment that pushed core inflation back above target.
Lachaine sees limited impact from additional Bank of Canada rate cuts on broader market dynamics or institutional asset allocation strategies. With policy already sitting at a neutral level, he views the expected 50 basis points of further easing as relatively insignificant.
“Fifty basis points in Canada is not a major deal for the fair values of the Canada curve,” he said. “It’s not a big deal for the valuation of the S&P/TSX.”
For Lachaine, the more influential force for markets over the next several months will be the Federal Reserve. He expects the Fed to implement five to six cuts by mid-2026 as it moves toward a neutral policy rate, something he believes will support both equity and bond markets.
While some may point to rising inflation, Lin sees limited cause for concern in the medium term. He argues that pricing power remains weak and that “medium-term inflationary pressures are actually going to be quite muted.”
As a result, he expects the Bank of Canada to cut another 25-basis points at its upcoming meeting and leave the door open to further reductions, particularly if the economy tips into recession, which he believes the country is already on the brink. With GDP growth already showing signs of strain, he expects the third quarter to either show weak growth or a slight contraction. If that’s the case, it could mark the start of a technical recession.
“I think there is a high likelihood that we either see subdued growth or we could even see a mild contraction,” he said, noting that two consecutive quarters of negative growth would meet the formal threshold for a recession.
Still, Lin believes that even if a recession unfolds in Canada, it won’t be all that severe, highlighting Canada’s strong fiscal and financial foundations, like low net government debt and well-capitalized banks, as reasons for optimism.
“If we do fall into recession in Canada this time, I'm expecting it a base case scenario of a mild to moderate recession rather than a repeat of what we saw during COVID or 2008,” he said.
