Economists point to weak jobs, soft growth, and tariff changes as key drivers ahead of decision
Canada’s central bank is widely expected to cut its policy rate on Wednesday, as weak growth, job losses, and new inflation data converge ahead of a pivotal decision.
According to the Financial Post, economists and markets anticipate the Bank of Canada will reduce its rate by a quarter point to 2.5 percent, with market odds of a cut rising to 90 percent.
The move would break three consecutive holds, as recent reports show an economy under pressure from both slowing output and a deteriorating labour market.
Statistics Canada’s August inflation data, set for release the day before the announcement, remains a key variable.
As reported by the Canadian Press, expectations are for consumer prices to climb to two percent, up from 1.7 percent in July.
Oxford Economics director of Canada economics Tony Stillo said his forecast also points to two percent inflation, noting that energy and food prices rose last month.
He added that counter-tariffs on US grocery imports contributed to sticky food inflation, though the September removal of most tariffs should ease pressures.
Canada’s economy contracted by 1.6 percent in the second quarter, a sharper decline than expected, while employment fell by more than 100,000 in July and August, lifting the jobless rate to 7.1 percent.
Capital Economics said this weakness is spreading beyond trade-impacted sectors, and expects more Bank of Canada governing council members to support rate cuts.
Stillo said Canada is “teetering on a recession” and forecast that the central bank would take “an insurance policy out” with a quarter-point cut in September and another in October, bringing the rate to 2.25 percent.
He described that level as the bottom of the Bank of Canada’s neutral range, where policy is neither restrictive nor stimulative.
At the July rate decision, Governor Tiff Macklem signalled cuts could be considered if inflation stayed contained.
Inflation remains under two percent overall, though core inflation is closer to three percent, according to the Financial Post.
Economists remain divided on the outlook.
TD Economics said in a September 12 report that rate reductions are justified given trade uncertainty and labour market weakness, though a surprise jump in inflation could delay action.
TD also forecasts the rate will bottom at 2.25 percent.
Royal Bank of Canada economists Nathan Janzen and Claire Fan argued the data has not worsened beyond expectations and said the central bank may “narrowly opt for a hold,” depending on inflation results.
Others see deeper cuts ahead.
BMO’s Douglas Porter told the Financial Post that the policy rate could ultimately fall to two percent by early next year.
Desjardins chief economist Jimmy Jean said the cancellation of counter-tariffs on billions of dollars of US goods covered under CUSMA reduced inflation concerns, giving the Bank of Canada “a very strong case to cut interest rates.”
Fiscal policy also factors into the outlook.
Prime Minister Mark Carney has indicated the fall budget will combine operational austerity with large capital investments in defence and infrastructure.
Stillo said such plans could stimulate the economy and ease pressure on monetary policy.
Despite growing consensus for easing, Stillo cautioned that trade and fiscal uncertainties could shift quickly.
“The trade war can turn on a dime, and I don’t think they want to put in place, say, significant interest rate cuts only to retrace them later,” he said. “I think the last thing a central banker wants to do is have to reverse course.”
