OTTAWA – Avery Shenfeld doesn’t think the Bank of Canada will cut its benchmark interest rate at its decision on Wednesday, but if it does, he said it will be a “pleasant surprise.”
“There’s always a chance that they’ll surprise with the rate cut,” the chief economist of CIBC said.
“But I’m not holding out that much hope.”
Most economists are also expecting the Bank of Canada will hold its policy rate steady at 2.75 per cent for a third consecutive decision later this week.
As of Friday afternoon, financial markets were placing odds of a quarter-point rate cut on Wednesday at just seven per cent, according to LSEG Data & Analytics.
Stubbornness on the inflation front and surprise strength in the labour market have quashed arguments for further easing since the central bank’s June decision.
The Canadian economy gained an unexpected 83,000 jobs in June, Statistics Canada reported earlier this month, driving the unemployment rate lower for the first time since January.
A few days later, StatCan reported annual inflation ticked up to 1.9 per cent last month while the Bank of Canada’s closely watched core inflation figures held stubbornly around three per cent.
“Overall, sticky inflation readings, a weakening but relatively resilient economic backdrop and prospects for larger fiscal spending are reasons why we do not expect the BoC will cut again in this cycle,” RBC economists Claire Fan and Abbey Xu wrote in a note Friday.
But Shenfeld’s call for a lower policy rate — CIBC expects two more quarter-point drops before the Bank of Canada is done — isn’t based on what’s happened in the economy, it’s about what’s on the horizon.
Outside of the June jobs jump, the labour market is still broadly weak with the unemployment rate at 6.9 per cent, Shenfeld noted.
He also expects Canada’s tariff dispute with the United States led to an economic contraction in the second quarter of the year.
All told, there’s enough “slack” building in the economy to take steam out of inflation in the months to come, Shenfeld said.
The Bank of Canada’s own second-quarter business outlook survey released last week suggests that many firms are opting to absorb higher costs from tariffs, rather than pass them on to consumers who may be reining in spending amid economic uncertainty.
Shenfeld said that’s a sign that tariff impacts “won’t extend into a more persistent inflation issue.”
He said that once the central bank gains enough confidence that any tariff-induced inflation pressures will be short-lived, monetary policymakers should feel confident enough to lower interest rates.
“I think at this point they know enough to rule out the worst-case scenario on trade,” Shenfeld said.
Bank of Canada governor Tiff Macklem has explicitly said monetary policymakers are being less forward-looking than usual in the trade war. The central bank didn’t publish a traditional forecast for the economy in its April monetary policy report, instead offering two scenarios for how tariffs could hit the economy.
Jimmy Jean, chief economist at Desjardins, said he believes the Bank of Canada will have gathered enough clarity on the trade front to return to formal forecasts in this week’s MPR.
“The uncertainty is there for everyone to recognize. But there’s a point where you’ve got to sort of, stick your neck out and make the proper caveats,” Jean said.
Tariff deadlines continue to hover over the Bank of Canada’s head — U.S. President Donald Trump has threatened to levy tariffs of 35 per cent on Canadian imports starting Friday if a trade deal isn’t reached before then, though CUSMA-compliant goods are expected to be exempt from the duties.
Some forecasters, including RBC, expect the Bank of Canada is already done rate cuts and will turn the job of stimulating the economy through the trade war over to federal and provincial governments.
While Jean also believes the central bank will opt to hold rates again on Wednesday, he said the bank’s next decision in September is an “open possibility” for a cut.
Trump’s sectoral tariffs targetting Canada’s steel, aluminum and copper industries are of particular concern for Ontario and Quebec, Jean said. If those tariffs are sustained, he argued more rate cuts from the Bank of Canada will be warranted to cushion the economic hit.
In addition to some sector-specific relief, the federal government has moved in recent months to ramp up Canada’s defence and infrastructure funding — spending that could offer fiscal, rather than monetary, support for the economy.
But Jean said Desjardins is expecting that lift to come over the ensuing years, not months, opening a window for the Bank of Canada to lower rates in the near-term.
“We think, despite those measures being in the pipeline, the Bank of Canada will still in September have a valid reason to cut interest rates,” he said.
This report by The Canadian Press was first published July 28, 2025.
