Following the Bank of Canada’s decision on Wednesday to reduce its key interest rate for the first time since March, economists said that the central bank remains cautious in its outlook, as the battle against stubbornly high core inflation has not yet been won.
“Those core measures of inflation, they’ve been above three per cent, that’s quite a distance from the two per cent target,” Frances Donald, chief economist at RBC, told BNN Bloomberg in an interview on Wednesday.
“Looking at (the) breadth of inflationary pressures, those are still quite large and inflation expectations amongst businesses in Canada… it still looks like the job is not done on the inflation front.”
Donald’s comments came after the Bank of Canada announced it was lowering its overnight rate by 25 basis points from 2.75 per cent to 2.50 per cent, in line with expectations.
Despite ongoing inflation concerns, the bank said in its decision that a softening labour market as well as weak gross domestic product (GDP) data from the second quarter of this year provided enough justification for the cut, which should provide stimulus to Canada’s economy.
Inflationary pressures, Donald noted, have also eased somewhat compared to earlier in the year.
“What we heard from the Bank of Canada today is they think the (inflation) risks have been diminished relative to where they were a couple months ago, they noted reciprocal tariffs are no longer in play for Canadians, and some pressure on the labour market,” she said.
Wednesday’s rate cut came after three consecutive rate holds from the bank, whose governor, Tiff Macklem, has expressed the need for a cautious approach to monetary policy given the ongoing trade conflict between Ottawa and U.S. President Donald Trump’s administration.
Canada’s counter tariffs on U.S. goods, which were initially imposed in retaliation to levies imposed on Canadian products, were inflationary for consumers, according to many experts.
As trade tensions have eased and the majority of counter tariffs removed by Prime Minister Mark Carney’s government, the risk of further upward inflation pressure has decreased, the bank said, giving it more confidence a rate cut wouldn’t spur a spike in price growth.
“The last thing the Bank of Canada (wanted) was to… cut interest rates to a level that’s too stimulative and at the same time you start to get pass-through of tariffs to consumer prices and it gets the wheels of inflation in Canada spinning again,” Robert Kavcic told BNN Bloomberg.
The senior economist and director of economics at BMO Capital Markets said in a Wednesday interview that the removal of counter tariffs took away much of the uncertainty the Bank of Canada had been concerned about, giving it “a green light” to resume rate cuts.
In its decision, the Bank of Canada did not commit to any further policy easing, citing ongoing uncertainty on the trade front and an inability to create accurate longer-term economic forecasts.
“The bank was pretty careful today not to tip their hand either way and not to give any explicit guidance that a rate cut’s coming at the next meeting,” Kavcic said.
“We are forecasters though, and we’re always making judgment calls on these things and when we’re looking at data flow that’s coming now and our forecast for the next six to eight months… the balance of risk does probably suggest we’re going to get another 50 basis points of easing.”
That expected easing won’t necessarily come at the bank’s next two meetings, Kavcic noted, “but even if it’s on a quarterly basis I suspect that by the time we get to the spring of 2026 we could very well have policy rates down at two per cent.”
