Could the central bank opt against lowering rates?
Persistent price pressures could keep the Bank of Canada on hold in its next interest rate decision despite speculation that the central bank will cut, according to a new analysis from BMO Capital Markets.
“Stubborn core inflation sets a high bar for another Bank of Canada rate cut, reducing the odds of a move on September 17,” wrote Sal Guatieri, senior economist and director at the banking giant.
While Canada’s overall inflation rate remains below the BoC’s 2% goal, the underlying rate – a more closely-watched measure by the central bank – is tracking “moderately above the target,” Guatieri highlighted.
He noted that if future job and inflation reports remain subdued, the Bank could ease in October, eventually taking the policy rate down 75 basis points to moderately stimulative levels of 2.0% before next spring.
Trade war takes economic toll
The analysis comes as Canada grapples with significant economic headwinds from escalating trade tensions. Rather than receiving a formal extension of trade talks, Canada was hit with a higher 35% “fentanyl” duty, up from 25%.
The trade conflict contributed to a sharp economic contraction in the second quarter, with real GDP falling 1.6% on an annualized basis amid what Guatieri described as “pandemic-like drops in exports and business equipment investment.”
“Basically, the trade war put an abrupt end to an expansion that was outrunning most other advanced nations, including the US,” the economist wrote.
Despite the setback, BMO expects Canada to avoid a technical recession and expand slightly in the third quarter, supported by consumer resilience and the “Buy Canada” movement.
Mixed economic signals
Consumer inflation remains relatively low at 1.7% year-over-year in July, partly due to the removal of the consumer carbon tax. However, the central bank believes the underlying rate continues to track moderately above its target.
The labour market presents a mixed picture, with unemployment currently at 6.9% and expected to peak at 7.3% by year-end before falling to 6.7% late next year. Job growth has slowed to an average of 15,000 per month this year, about half last year’s rate.
Housing market shows signs of recovery
Despite slower population growth, home sales are beginning to recover after three years of struggles. Market conditions vary significantly by region, with buyers maintaining control in Ontario and British Columbia while sellers command markets across the Prairies, Atlantic Canada, and Quebec.
The federal government’s planned legislation to reduce GST on new homes for first-time buyers is expected to provide additional market support.
BMO projects the Canadian economy will strengthen to a 1.4% growth rate in 2026 from an estimated 1.2% in 2025, supported by lower interest rates and federal financial support for tariff-affected industries.
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