OTTAWA – The Bank of Canada will have to grapple with a last-minute inflation report, a shift in Ottawa’s tariff stance and lingering uncertainty about government spending plans heading into its interest rate decision on Wednesday.
Financial markets are overwhelmingly expecting the central bank to break a string of three consecutive holds and cut its policy rate by a quarter point to 2.5 per cent, according to LSEG Data & Analytics.
Before the Bank of Canada announces its monetary policy decision, governing council will get a look at August inflation data from Statistics Canada on Tuesday.
Economist expectations for the consumer price index is for the annual rate to rise to two per cent, from 1.7 per cent in July, market data shows.
Tony Stillo, director of Canada economics at Oxford Economics, said that matches his own forecast for two per cent inflation for August, as prices for energy and food last month accelerated.
Stillo said he expects Canada’s counter-tariffs on grocery items such as Florida orange juice contributed to sticky food inflation last month.
August’s inflation figures won’t reflect Canada’s move to waive the majority of those retaliatory tariffs at the start of September.
Stillo said that decision, combined with Canada’s economy contracting in the second quarter, will take some steam out of prices.
Canada is “teetering on a recession,” Stillo argued.
Whether GDP declines again in the third quarter or not, he said the economy will struggle to eke out growth in the second half of the year as uncertainty around the trade war persists.
While Oxford Economics previously thought the Bank of Canada was done cutting rates, Stillo said the firm has adapted its forecast.
“The equation has changed now that Canada has reduced and eliminated most of its retaliatory tariffs,” he said.
“In the context of a weak economy, I think the bank is going to take an insurance policy out and do a quarter-point cut in September and we think it’ll be followed up by another quarter-point cut in October.”
Stillo said that would bring the policy rate to 2.25 per cent, the bottom of the Bank of Canada’s so-called neutral range, where monetary policy is neither too stimulative nor too restrictive for growth.
A Sept. 12 report from TD Economics said the central bank has reason to lower rates as trade uncertainty and a weakening jobs market work to cool residual inflation pressures.
“However, an upside surprise to inflation readings may keep the BoC to the sidelines,” the report said.
“Overall, recent data flows have more or less tracked the bank’s forecast scenario consistent with a rising need for a further reduction in the policy rate.”
TD said it still believes the BoC’s cutting cycle is nearing the end, with a 2.25 per cent policy rate being the target.
In the central bank’s summary of deliberations from its July 30 interest rate decision, some governing council members expressed that future cuts could be warranted “particularly if the labour market softened further.”
Since that time, StatCan has reported a collective loss of more than 100,000 jobs over July and August, enough to drive the unemployment rate two ticks higher to 7.1 per cent.
Thomas Ryan, North America economist with Capital Economics, said in a note last week that labour market weakness is now spreading beyond trade-impacted sectors.
He expects that shift will be enough to push other members of the Bank of Canada’s governing council into the easing camp.
Combined with diminishing inflation risks, Capital Economics expects the bank to cut rates this week and once more before the end of the year.
The Bank of Canada has so far avoided being too forward-looking during the burgeoning tariff dispute, given the unknowns around how U.S. trade policy would evolve and how the Canadian economy and inflation would react.
Stillo said he expects the bank will shift its stance and take “baby steps” toward providing a bit more guidance.
But he said the other question mark hanging above the Bank of Canada’s head is what the federal government could have in store as part of its planned fall budget.
Prime Minister Mark Carney has signalled the budget will come with both austerity on the operations side and significant capital investments geared toward defence and infrastructure spending.
Stillo said the Bank of Canada will want to take note of the spending plans when they’re announced, which he expects will stimulate the economy and take some of the pressure off monetary policy to guard against further weakening.
With uncertainty still swirling around trade and fiscal policy, Stillo said he expects the central bank will be “cautious” and “pragmatic” with any easing steps it takes.
“The trade war can turn on a dime, and I don’t think they want to put in place, say, significant interest rate cuts only to retrace them later,” he said.
“I think the last thing a central banker wants to do is have to reverse course.”
This report by The Canadian Press was first published Sept. 14, 2025.
