As widely anticipated, the Bank of Canada cut its policy rate by a further 25bp to 2.25%, citing “US trade actions and related uncertainty” that are “having severe effects on targeted sectors including autos, steel, aluminium, and lumber”. GDP contracted 1.6% in the second quarter of this year, and “growth is expected to be weak in the second half of the year” as well.
The central bank acknowledges that government support is coming, but the jobs market “remains soft” with the unemployment rate at a four-year high of 7.1%. The growth outlook is predicted to remain subdued in its forecasts, with the economy projected to expand 1.2% this year, 1.1% next year and 1.6% in 2027, versus Bloomberg consensus projections of 1.2%, 1.2% and 1.9% respectively.
Inflation has come in a little higher than the Bank predicted a few months ago, but given the issues surrounding economic activity – remember three quarters of Canada’s exports go to the US and the Canadian consumer is amongst the most indebted between developed market peers – inflation is expected to “ease in the months ahead”.
After 275bp of rate cuts, the BoC now believes that the current policy rate is “at about the right level to keep inflation close to 2% while helping the economy through this period of structural adjustment”. This suggests that it will likely hold rates steady at the next policy meeting in December – but given the acknowledgement of the “difficult transition” the economy is facing, the risks remain skewed towards at least one additional cut in early 2026. Currently, the market is pricing a 50-50 chance of such action by April.
