'I think a recession is more likely than not in Canada,' says Russell Investment's BeiChen Lin
With the next Bank of Canada (BoC) rate decision looming next week, institutional investors are sharpening their focus on what could be one of the most consequential monetary policy calls of 2025.
After months of uncertainty, many are asking whether the BoC will resume cutting rates or hold steady in the face of persistent inflation and slowing growth.
For BeiChen Lin, 2025 has been a “waiting for Godot” moment. Yet, he thinks the coming meeting could be pivotal as he believes September could “be the month when they're going to be able to resume their rate cuts with a 25-basis point cut,” he said.
“We've seen a lot of market volatility in the recent summer months, but I think it is exactly during those periods of volatility that potentially creates opportunity for institutional and retail investors alike. In other words, volatility is not something to be afraid of,” said Lin, senior investment strategist and head of Canadian strategy for Russell Investments.
The BoC’s cautious approach this year stems from conflicting economic signals in Lin’s view. Canada’s labour market has softened significantly, with unemployment hovering near 7 per cent, more than two percentage points above 2023 lows. Meanwhile, per capita economic growth has been weak, even slipping into contraction in some quarters.
Still, inflation remains sticky, particularly when measured by CPI trim, median, and common, which are averaging around 3 per cent - the upper limit of the Bank’s target range.
Notably, however, Lin sees high odds of a Canadian recession, especially when compared to the US, where he expects a softer economic landing.
“I think a recession is more likely than not in Canada,” he said, pointing to the country’s fragile starting point heading into this period of trade and macro uncertainty.
He noted that Canada’s labour market has been persistently weak and GDP per capita has shown limited momentum, leaving the economy more exposed to shocks. However, Lin doesn’t anticipate a severe downturn. Thanks to a well-capitalized and tightly regulated banking system, he expects any recession to be relatively moderate, notably nothing resembling the COVID-era collapse.
Darcy Briggs, senior vice president and portfolio manager for Franklin Templeton Fixed Income, agrees that softening economic conditions and policy uncertainty have restrained business activity.
“You’ve got kind of meandering, squishy growth. It's not recessionary, but it's not solid,” he said, attributing part of the economic drag to delays in capital investment, especially in industries like autos and energy, due to trade policy ambiguity and tariff impacts.
While both Lin and Briggs believe the BoC should prioritize growth risks over lingering inflation concerns, they offer contrasting opinions in their expectations of the path forward. Lin foresees at least two more cuts this year, possibly more whereas Briggs also sees the central bank cutting further, but within a narrower band.
“To get a cut or two, that’s probably more likely. Three might be a bit of a stretch,” he said.
Still, he doesn’t rule out a deeper cycle of easing, especially if data continues to deteriorate.
“The data is allowing the bank to kind of sit back… but you want to be methodical in the way that you’re doing this,” said Briggs, while Lin added if the BoC holds off on further rate cuts, “that increases the likelihood that they're going to have to do outsized rate cuts later on to stimulate the economy.”
However, Lin cautions that the path of policy will depend heavily on how the economy evolves over the next few months. If Canada avoids a recession, Lin sees rates falling to around 2 or 2.25 per cent. But if a downturn materializes, he expects the central bank will need to slash rates well below that level to provide adequate stimulus. In that environment, Lin believes Canadian government bonds could offer institutional investors meaningful downside protection.
He also argues that the BoC’s recent holding pattern reflects both this data tension and broader uncertainty, particularly on trade. But with the US now settling major trade deals and the economic picture becoming clearer, he sees the Bank shifting gears.
Additionally, the US economy added 911,000 fewer jobs than previously estimated in the 12 months ending in March, according to Labor Department data released last week, the pressure is on for the Fed to begin their cutting cycle.
While he emphasized the September decision isn't locked in, the groundwork has been laid, as he downplays inflation risks from new tariffs, calling them “a small subset of imports,” and expects disinflationary pressure to build as weak growth continues.
He underscored the Bank of Canada will likely need to move interest rates closer to the lower end of its estimated neutral range - currently pegged between 2.25 and 3.25 per cent as economic conditions remain subdued. Given the ongoing weakness in labour markets and sluggish growth, he thinks the central bank may have to deliver more than just one cut before year-end.
“I think we can now turn their focus back towards the growth side of the equation,” he said. “We could expect to see Bank of Canada take rates down closer to two and a quarter per cent by the end of this year. It might take a little bit longer than expected to get all the way down to 2 per cent... but I don’t expect to see inflation go up beyond three and a half or 4 per cent.”
For the central bank, he added, the real question now is not whether to hike, but “when do I start cutting, and by how much?”
Yet, Briggs cautions against reacting to political pressure or speculative narratives, drawing a contrast with the debate over Federal Reserve policy.
“The data is not really suggesting that the Fed has to cut rates, and yet you’re getting a lot of brow beating to cut rates,” he said, emphasizing the central banks should resist noise and focus on incoming data.
“In a world of narrative, the data will tell you where you need to go,” he said.
