Canada's economy and job market weaken, and the central bank revives expectations of a rate cut
2025-09-17 02:00:49
After a months-long pause, most economists expect the Bank of Canada to resume interest rate cuts on September 17, 2025. According to a Reuters survey of 32 economists, nearly 80% (25 respondents) believe the central bank will cut the overnight rate by 25 basis points to 2.50%, in line with market pricing. The survey cited weak economic activity and a deteriorating labor market as the primary drivers. Furthermore, over 70% (23 respondents) expect at least one more rate cut this year, to 2.25% or lower.
Economists at TD Economics expect the central bank to gradually cut interest rates to a neutral level of 2.25% to support economic growth by mid-2025.
The weakness in the labor market has spread beyond the manufacturing sector affected by tariffs to a wider range of sectors, which will prompt the central bank to cut interest rates further in September and the fourth quarter. Experts at Canadian Imperial Bank of Commerce (CIBC) also believe that a September rate cut is inevitable, with another cut possible before the end of the year to stimulate demand and recruitment.
Canada's economy and job market weaken
The Canadian economy is facing severe challenges. Affected by the Trump administration's tariff policy, GDP shrank by 1.6% year-on-year in the second quarter, and some economists warned that the economy may fall into recession.
Data from the National Bank of Canada shows that investment in industrial machinery and equipment fell to its lowest level in over 40 years from April to June. The unemployment rate rose to 7.1% in August, a nine-year high outside of the pandemic. Job losses continued for two consecutive months (41,000 in July and 66,000 in August), and the number of job vacancies fell to a seven-year low. Using US statistical methods, Canada's unemployment rate is approximately 6%, higher than the US's 4.3%.
Stephen Brown, deputy chief economist for North America at Capital Economics, said high unemployment rates, far exceeding natural levels, had become the main basis for the central bank to cut interest rates in September.
Dominic Lapointe, global macro strategist at Manulife Investment Management, noted: "Given the lack of offsetting growth momentum elsewhere, the Bank of Canada may shift its focus from inflation to economic slack." In the minutes describing the deliberations before the July meeting, a group of senior policymakers believed that further interest rate cuts would be necessary given the persistent slack in the economy and the weak labor market.
The August employment data further confirmed the deteriorating economic outlook, supporting a 25 basis point cut in both September and October. Job losses will continue in the coming months, and sectors affected by tariffs will continue to struggle, leading to increased economic slack.
Inflation dynamics and the impact of tariff policies
While core inflation remains near the upper limit of the central bank's 2% target, overall inflation has risen to 1.9%, and the three-month annualized core inflation rate has fallen to 2.5%, indicating little sign of demand-driven inflation. Data on Tuesday showed that the average core inflation rate fell slightly to 3.05%.
Canadian Prime Minister Mark Carney last month canceled retaliatory tariffs on about $21 billion worth of U.S. imports (including orange juice and home appliances), which took effect on September 1, easing the central bank's concerns about "tariffs pushing up inflation."
Royce Mendes, managing director of Desjardins Capital Markets, believes the move will reduce upward pressure on prices.
Despite weak GDP momentum and a deteriorating labor market, CPI inflation surveys suggest no significant decline, but slack will keep inflation in check. With tariff exemptions taking effect, inflation is unlikely to rise further, and economic weaknesses (such as in the labor market, housing, and manufacturing) will push the central bank to cut interest rates further. The United Nations Conference on Trade and Development predicts that US import tariffs will disrupt supply chains and significantly increase Canada's recession risk by 2025.
Economists at Scotiabank revised their forecasts after weak jobs data and called for two rate cuts before the end of the year to counter spillover effects from U.S. tariffs.
Tu Nguyen, global economist at Morningstar, noted that domestic data will dictate the central bank's path after tariff uncertainty subsides, and he expects two, rather than three, rate cuts before the end of the year.
Economists at TD Economics expect the central bank to gradually cut interest rates to a neutral level of 2.25% to support economic growth by mid-2025.
The weakness in the labor market has spread beyond the manufacturing sector affected by tariffs to a wider range of sectors, which will prompt the central bank to cut interest rates further in September and the fourth quarter. Experts at Canadian Imperial Bank of Commerce (CIBC) also believe that a September rate cut is inevitable, with another cut possible before the end of the year to stimulate demand and recruitment.
Canada's economy and job market weaken
The Canadian economy is facing severe challenges. Affected by the Trump administration's tariff policy, GDP shrank by 1.6% year-on-year in the second quarter, and some economists warned that the economy may fall into recession.
Data from the National Bank of Canada shows that investment in industrial machinery and equipment fell to its lowest level in over 40 years from April to June. The unemployment rate rose to 7.1% in August, a nine-year high outside of the pandemic. Job losses continued for two consecutive months (41,000 in July and 66,000 in August), and the number of job vacancies fell to a seven-year low. Using US statistical methods, Canada's unemployment rate is approximately 6%, higher than the US's 4.3%.
Stephen Brown, deputy chief economist for North America at Capital Economics, said high unemployment rates, far exceeding natural levels, had become the main basis for the central bank to cut interest rates in September.
Dominic Lapointe, global macro strategist at Manulife Investment Management, noted: "Given the lack of offsetting growth momentum elsewhere, the Bank of Canada may shift its focus from inflation to economic slack." In the minutes describing the deliberations before the July meeting, a group of senior policymakers believed that further interest rate cuts would be necessary given the persistent slack in the economy and the weak labor market.
The August employment data further confirmed the deteriorating economic outlook, supporting a 25 basis point cut in both September and October. Job losses will continue in the coming months, and sectors affected by tariffs will continue to struggle, leading to increased economic slack.
Inflation dynamics and the impact of tariff policies
While core inflation remains near the upper limit of the central bank's 2% target, overall inflation has risen to 1.9%, and the three-month annualized core inflation rate has fallen to 2.5%, indicating little sign of demand-driven inflation. Data on Tuesday showed that the average core inflation rate fell slightly to 3.05%.
Canadian Prime Minister Mark Carney last month canceled retaliatory tariffs on about $21 billion worth of U.S. imports (including orange juice and home appliances), which took effect on September 1, easing the central bank's concerns about "tariffs pushing up inflation."
Royce Mendes, managing director of Desjardins Capital Markets, believes the move will reduce upward pressure on prices.
Despite weak GDP momentum and a deteriorating labor market, CPI inflation surveys suggest no significant decline, but slack will keep inflation in check. With tariff exemptions taking effect, inflation is unlikely to rise further, and economic weaknesses (such as in the labor market, housing, and manufacturing) will push the central bank to cut interest rates further. The United Nations Conference on Trade and Development predicts that US import tariffs will disrupt supply chains and significantly increase Canada's recession risk by 2025.
Economists at Scotiabank revised their forecasts after weak jobs data and called for two rate cuts before the end of the year to counter spillover effects from U.S. tariffs.
Tu Nguyen, global economist at Morningstar, noted that domestic data will dictate the central bank's path after tariff uncertainty subsides, and he expects two, rather than three, rate cuts before the end of the year.
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