Growing signs that the economy is struggling should prompt the Bank of Canada to resume cutting its key interest rate next week, experts predict.
The C.D. Howe Institute’s Monetary Policy Council, formed by prominent bank economists and academics, is calling for a 25-basis-point reduction on Wednesday, and another 25-basis-point cut at the subsequent decision in October.
The central bank chose to stand pat in its previous three decisions, leaving the policy rate at 2.75 per cent. In July, bank officials cited high uncertainty and ongoing inflation pressures as reasons to remain on hold.
But now, economists are sounding the alarm following a slew of recent data releases showing a softer labour market, shrinking economic activity and weaker business investment in light of U.S. President Donald Trump’s tariffs.
“There’s quite a bit of evidence that the Canadian economy is building a lot of slack,” Beata Caranci, chief economist at TD Bank and one of the members of the C.D. Howe council, told the Star.
She believes the Bank of Canada has “room to cut without having to worry about inflation.”
Statistics Canada is set to publish one more inflation report on Tuesday, just before the Bank of Canada’s announcement. The latest release showed inflation fell to 1.7 per cent in July — remaining below the central bank’s target of two per cent.
Job losses spread
In August, the Canadian economy shed 66,000 jobs while the unemployment rate rose to 7.1 per cent, StatCan reported on Sept. 5. That translated into 1.6 million unemployed people last month.
The jobless rate was the highest since May 2016 (excluding 2020 and 2021), having risen significantly since the beginning of this year, according to StatCan.
Some Bank of Canada officials had previously indicated they would support further cuts if the labour market continued to weaken, said Thomas Ryan, economist at Capital Economics.
Ryan also expects the central bank will cut rates by 25 basis points on Wednesday.
“The further rise in the unemployment rate may itself be enough to prompt a cut,” he wrote in a note to clients, adding that job losses now appear to be spilling into non-tariff-affected sectors.
Economy shrinks
At the same time, StatCan reported that Canada suffered the biggest contraction in economic activity since the pandemic in the second quarter, resurfacing fears of a looming recession.
Gross Domestic Product (GDP) data came in much lower than most economists predicted, but was only slightly worse than what central bankers expected.
Economists largely blamed the GDP drop on the trade war, since it was driven by lower exports as well as weaker business investment in machine and equipment.
“Higher tariffs in general plus uncertainty is not a good combination,” said TD Bank’s Caranci.
“The cost of doing business has gone up significantly for a portion of the economy. And for those industries that are not on the trade side, they still face the uncertainty of what the outlook looks like for Canada,” she added.
As companies lay people off or freeze hiring, consumers also tend to spend less, pumping the brakes on the economy. An interest rate cut by the Bank of Canada could help stimulate consumption and business spending.
“What’s happening is, you end up with a lot of idle people, and idle machinery and idle everything else,” said Caranci.
