The Bank of Canada is widely expected to restart its rate-cutting cycle this week, with economists projecting a 25-basis-point reduction on September 17 — a move that could offer some relief to borrowers but also signals just how much Canada’s economy has cooled.
CIBC economist Ali Jaffery argues that Canada’s case for cutting rates is even stronger than the U.S. Federal Reserve’s, despite both central banks preparing to ease policy. Canada has slipped deeper into slack conditions this year, with its output gap estimated at -1.5% and GDP contracting 1.6% in Q2 amid U.S. tariffs. The labour market has softened significantly, shedding 65,500 jobs in August and pushing unemployment to its highest level in nine years outside the pandemic.
“Enough dust has also settled to allow Governor Macklem to focus on what lies ahead and be less data-dependent,” Jaffery wrote, suggesting that inflation’s return near the 2% target gives the Bank of Canada room to look past short-term pressures. Businesses’ expectations remain steady, and some earlier inflation drivers, such as counter-tariffs and a weak loonie, have faded.
The central bank is expected to leave the door open for additional cuts later this year, depending on Tuesday’s inflation report. Economists forecast headline inflation to tick up slightly to 2.0% in August from 1.7% in July, but with monthly price growth flat and core inflation steady, it is unlikely to derail the decision.
Meanwhile, the U.S. Federal Reserve is also poised to cut rates this week, though its move is framed as a return to neutral rather than a response to recessionary risks. U.S. unemployment sits at 4.3%, and wage growth has accelerated, leaving less urgency for aggressive easing. Nonetheless, markets have already responded, with U.S. mortgage rates dropping to 6.35%, their lowest in nearly a year.
In Canada, bond yields have slipped back into the 2.70% range, pushing five-year fixed mortgage rates below 4% at several lenders, including RBC. Variable-rate borrowers would also see immediate relief if the Bank of Canada cuts as expected.
Still, some economists are urging caution. Derek Holt of Scotiabank warns that moving too quickly risks undershooting inflation and could force the bank to reverse course later. “High uncertainty around projections and inflation risk merit high caution toward overdoing it on the policy rate,” he wrote.
With markets fully pricing in Wednesday’s move, attention is now shifting to just how far Governor Macklem is willing to take this easing cycle — and whether Canada’s fragile economy can bounce back before talk of renewed tightening returns.