Markets brace for another central bank rate cut as trade and growth challenges persist
The Bank of Canada appeared poised to lower its policy rate again this week, as persistent trade turbulence and a sluggish economic outlook overshadowed a recent uptick in inflation.
After resuming monetary easing last month, citing a “weaker economy and less upside risk to inflation,” the central bank cut its benchmark rate by 25 basis points to 2.5%.
Now, most economists and market watchers expect another quarter-point reduction, bringing the rate to 2.25%, the lower end of the BoC’s neutral range.
Trade uncertainty weighs on growth
Canada’s economic signals have been mixed. September saw a rebound in employment, with 60,400 jobs added—far above expectations—while the unemployment rate held at 7.1%.
Manufacturing, battered earlier in the year by trade tensions, posted its first job gains since January. Yet, the sector remains down 58,000 jobs since then, and youth unemployment climbed to 14.7%, its highest since 2010 outside the pandemic.
Despite the strong jobs report, “a large degree of slack remains within the labour market, which we think justifies a further interest rate cut from the Bank of Canada, although today’s strength in employment could delay the timing of that move,” Andrew Grantham, CIBC economist, said.
Exports remain weak, GDP growth is lacklustre, and business sentiment has soured amid renewed trade threats from the United States. President Donald Trump’s recent call-off of trade negotiations and threats of new tariffs have only heightened uncertainty, with economists warning of further downside risks to growth.
Inflation surprises but underlying pressures contained
Headline inflation jumped to 2.4% in September, up from 1.9% in August, driven by food and rent costs. Core measures, however, hovered just above 3%, the upper end of the BoC’s target band.
“Core inflation readings remain good enough for the Bank of Canada to cut next week when properly evaluated in terms of month-over-month trends and breadth,” Derek Holt, vice president and head of capital markets economics at Scotiabank, said.
Doug Porter, chief economist at BMO, noted, “Markets had been all but baking in a rate cut after Governor Macklem’s dovish remarks and soft Business Outlook Survey.”
Still, he cautioned that the inflation surprise “will make the Bank of Canada’s decision a bit more interesting next week than previously expected.”
Canada’s latest inflation uptick has divided economists, with many still expecting a Bank of Canada rate cut next week. Scotiabank’s Derek Holt and RBC’s Abbey Xu said underlying pressures remain contained, supporting a 25-basis-point reduction.https://t.co/YjjXgdSXB2
— Canadian Mortgage Professional Magazine (@CMPmagazine) October 22, 2025
Retail sales and business sentiment remain soft
Retail sales rebounded 1.0% in August, led by vehicles and clothing, but volumes have barely changed since December.
“Despite a decent August report, the disappointing September flash highlights the underlying weakness in Canadian retail spending,” Shelly Kaushik, BMO, said. Statistics Canada’s advance estimate points to a 0.7% drop in September sales, reinforcing the case for further easing.
Most economists agree that, despite inflationary pressures, the weakness in trade, labor, and retail sectors supports another rate cut. “The market is leaning so heavily to a rate cut now that a decision to hold would lead to a nasty whipsaw in yields,” Porter said.
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