Increasing Expectations for Rate Cuts: September May Be a Turning Point
The market consensus is that the Bank of Canada is nearing a policy turning point. After holding steady for several months, numerous institutions predict that policymakers will take action at the September meeting, initially reducing the overnight rate by 25 basis points to 2.50%. Several surveys also indicate that most economists expect another rate cut by year-end to inject liquidity into the economy, which remains under pressure.
Deteriorating Employment Market Intensifying Pressure
Recent employment data has shown a clear weakening trend, becoming a crucial reason for the central bank's policy shift. In August, the unemployment rate rose to 7.1%, reaching a high not seen since the pandemic and highlighting the labor market's fragility. Employment positions have been lost for two consecutive months, and job vacancies have fallen to a seven-year low. Analysts note that the high unemployment rate now far exceeds the natural level, providing ample justification for more accommodative monetary policy.
Signals of Economic Slowdown Persist
The weakness in Canada's economy is not limited to the manufacturing sector. The second quarter GDP contracted at an annual rate of 1.6%, and investment activities have plunged to multi-decade lows. Manufacturing, housing, and services sectors are all under pressure. Some institutions even warn that if external shocks continue, Canada may slide into a recession. As the economic slack increases, the central bank shifts its focus from inflation control to economic recovery.
Changes in Tariff Policy Alleviate Inflation Concerns
Although tariffs once drove up prices, recent measures have eased inflationary pressure. After Prime Minister Carney removed retaliatory tariffs on some U.S. products, import costs fell, helping to mitigate price increases. Analysts generally believe that this policy adjustment allows the central bank room to cut rates without fearing a resurgence in inflation.
Inflation Trend Gradually Eases
Core inflation remains at the upper end of the target range, while overall CPI slightly decreased to 1.9%. Three-month annualized data shows a gradual downward trend in core inflation. Experts note that with weakening economic demand and increasing capacity slack, there is a lack of lasting momentum for price increases. If the central bank adopts accommodative measures, inflation risks will be relatively manageable.
Uncertainty in Policy Path for the Year Remains
Although most institutions predict at least two rate cuts this year, the specific timing remains divisive. Some banks believe the Bank of Canada will cut rates by 25 basis points in September and December, while others favor a single rate cut within the year, postponing further adjustments to 2026. In any case, the market widely agrees that the current tightening cycle is essentially over, and a new phase of easing is beginning.
