Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
The Bank of Canada cuts its policy rate by 25bp to 2.50%, as expected.
The overall message from today’s decision is that the Canadian economy has deteriorated since the July meeting, especially in light of the recent job losses, and that underlying inflationary pressures are abating. Nevertheless, uncertainty regarding US tariffs and their impact on the economy remains high.
As a result, the Governing Council reiterated that it will be proceeding carefully with its policy rate. However, the central bank removed its forward guidance. This suggests to us that 1) the BoC will be data dependent and further rate cuts will depend on whether we see further weakening of the Canadian economy and labour market, and 2) that there may not be consensus within the Governing Council as to whether further cuts are needed, at this point.
What is clear is that the BoC continues to be less forward-looking than usual in the current context of elevated uncertainty and will be more reactive to incoming data and events.
Overall, we continue to believe that the general direction for interest rates is lower. However, with the Canadian economy no longer deteriorating but not rebounding, the timing of a cut will likely depend on whether the labour market continues to deteriorate and on further easing in underlying inflationary pressures. With the BoC’s measure of core inflation likely to ease below 3% by October, and the economy and labour market expected to remain tepid in the second half of 2025, we anticipate further cuts in October and December.
The BoC cut its policy rate by 25bp at 2.50%, as widely expected. The statement makes it clear that “a weaker economy and less upside risk to inflation” are the main reasons supporting the decision. However, the central bank removed its forward guidance that stated back in July that “if a weakening economy puts further downward pressure on inflation and the upward price pressures from the trade disruptions are contained, there may be a need for a reduction in the policy interest rate”.
Moreover, the Communique continues to emphasize that the “Governing Council is proceeding carefully, with particular attention to the risks and uncertainties.” This statement and the removal of the forward guidance suggest that 1) the BoC will be data dependent, and 2) that there may not be consensus within the Governing Council as to whether further cuts are needed, at this point.
The BoC notes that “global economic growth is showing signs of slowing”. The Bank notes that, in the US, “business investment has been strong but consumers are cautious and employment gains have slowed”, while inflation has increased in recent months, as some of the tariff costs are passed on to consumers. Elsewhere, it sees that growth in Europe has moderated due to the US tariffs, while the Chinese economy appears to be softening after some resilience in the first half of the year. They also note that global financial conditions have eased slightly since July due to continued equity price gains and lower bond yields.
On the Canadian economy, the BoC says it “is being affected by both US tariffs and the unpredictability of US trade policy”. The Bank notes that the economy contracted roughly in line with its expectations in the second quarter due to a sharp decline in exports to the US, “a sharp reversal from first-quarter gains when companies were rushing orders to get ahead of tariffs.” Business investment was also weaker. The BoC also notes that while consumer spending and housing were “healthy” in the first half of the year, some weakening should be expected in the second half of the year.
The BoC highlights that the labour market has weakened, which is one of the main changes to the balance of risks on inflation. It also takes note of the job losses in recent months, but adds that most of the weakness has been concentrated in trade-sensitive sectors.
On inflation, the BoC notes that “recent data suggest the upward pressures on underlying inflation have diminished”. The BoC adds that, while its preferred measures of core inflation remained around 3%, the upward momentum seen since the beginning of the year has dissipated. It also notes that other measures of underlying inflationary pressures are settling around 2.5%. Going forward, the BoC views that the removal of the retaliatory tariffs on US goods will reduce inflationary pressures.
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Independent Opinion
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