Fresh signs from inflation and trade could soon alter the path for interest rates in Canada
Markets regained momentum at the end of last week as expectations for potential interest rate cuts strengthened on both sides of the border, following remarks by US Federal Reserve chair Jerome Powell and fresh signs of easing inflation in Canada.
Speaking at the annual Jackson Hole symposium, Powell said the Fed’s policy rate is now “100 basis points closer to neutral than it was a year ago” and that stable labour market conditions allow policymakers to “proceed carefully.” He added that with rates in restrictive territory, “the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
The comments revived optimism for a rate cut at the Fed’s September 17 meeting, though Powell noted nearly a month of new data will still factor into the decision. The prospect of relief lifted US equities, with the S&P 500 rebounding from a five-day slump and hitting a record high. The US dollar, which had firmed in recent months after a steep first-half decline, eased following the speech.
Economic data remain mixed. US housing showed signs of stabilizing in July, but forward-looking indicators such as permits and mortgage applications stayed weak. Jobless claims rose to 235,000, while continuing claims climbed to their highest level since early 2018, pointing to some cooling in the labour market.
In Canada, the inflation outlook also shifted after Ottawa announced it would remove most retaliatory tariffs on US goods, excluding metals and some autos. The move, following a conversation between prime minister Mark Carney and US president Donald Trump, is expected to trim price pressures on items such as groceries and sporting equipment. Alongside a July consumer price index reading showing core inflation easing to 2.4%, it has opened the door for the Bank of Canada to consider rate cuts.
Markets currently see slim chances of a September cut—roughly one in three—but an October move is widely anticipated. Economists project up to three cuts by spring 2026, which would bring rates just below the neutral range. “Given the more benign trade-related inflation risks and a softening job market, we believe that below neutral would ultimately be entirely appropriate,” Bank of Montreal (BMO) chief economist Doug Porter noted in his latest analysis.
Canada’s economic picture remains fragile, with second-quarter GDP expected to contract by about 1% annualized when data are released Aug. 29. Analysts say growth may flatten in the third quarter, narrowly avoiding a technical recession.
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