The Bank of Canada is poised to implement a 25 basis point interest rate cut, responding to disappointing job figures and a contraction in the economy during the second quarter. If realized, this would mark the first rate reduction in nine months, with many economists predicting a further cut either in October or December.
The Bank of Canada was among the fastest major central banks to initiate rate cuts beginning in June of the previous year, slashing rates from 5% to 2.75% in March—a significant decrease of 225 basis points over a nine-month span. Since then, however, the central bank has maintained its policy rate, attributing its cautious stance to the prevailing uncertainties surrounding U.S. tariffs.
Governor Tiff Macklem indicated in July that the bank’s outlook would be tempered by economic uncertainties linked to these tariffs, although he asserted that a rate cut could be considered if inflation remained manageable and economic conditions deteriorated. In light of two notably weak employment reports since July, experts like Doug Porter, Chief Economist at BMO Capital Markets, suggest the central bank’s assessment of the economy may be shifting, increasing the likelihood of a rate cut this Wednesday.
The Canadian economy has witnessed a loss of over 100,000 jobs in the last two months, bringing unemployment to a nine-year high, outside of pandemic-related levels. Furthermore, the economy contracted by 1.6% in the second quarter, bolstering the argument for a reduction in interest rates. Current market expectations indicate a greater than 91% probability for a 25 basis point cut on September 17.
Macklem’s announcement regarding the rate decision is scheduled for 10:30 a.m. ET (1430 GMT). On the same day, the U.S. Federal Reserve is also expected to announce its rate decision, anticipated to be a 25 basis point reduction in its benchmark overnight interest rate to between 4.00% and 4.25%.
Concerns remain regarding inflation levels in Canada, particularly with core inflation proving to be resilient, remaining around the 3% mark. The consumer price index for August demonstrated a year-over-year increase of 1.9%, while the Bank of Canada’s preferred core measures—CPI-median and CPI-trim—recorded levels of 3.1% and 3%, respectively.
Rising prices for essential goods and services have become a focal point, as Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, highlighted a significant slowdown in core goods inflation from 2.6% in July to just 0.7% in August, relative to a three-month annualized rate. This reduction aligns with a broader trend that appears to set the stage for a 25 basis point rate cut on Wednesday.
