Bank of Canada is expected to lower 25 benchmarks on September 17, restarting its easy cycle after a summer pause.
Ali Jaffery, an economist at CIBC Capital Markets, believes that Canada’s exemption cases are stronger than those in the United States, and the Federal Reserve is also preparing to lower interest rates, but faces a completely different economic background.
“Although the market is not convinced, we see cases of Canada cutting tax rates stronger than the United States,” Jaffery wrote. “The U.S. economy is just beginning to show some signs of slack, and Canada is entering a slack situation more deeply throughout the year, with the real-time output gap approaching -1.5%, just a few threads above the recession.”
This weakness has emerged in the job market. Canada ruled 65,500 jobs in August, pushing unemployment to its highest level in nine years outside the pandemic. GDP signed a contract of 1.6% in the second quarter, subject to U.S. tariffs on Canadian exports.
“Enough dust has also been addressed to allow Governor McLean to focus on future issues, with a smaller scope of relying on data,” the CIBC report added. Although pointing out that the global context remains challenging and fiscal policy is unlikely to provide too much near-term relief.
The weakness of the Canadian economy also means there are many unused capabilities, which provides Canadian banks with more room for temporary price pressure. Title inflation is close to the target, and corporate expectations remain stable. Now, some forces that raise price increases, including the anti-election and the weaker loonie, have now been reversed.
Jaffery said this has enabled Gov. Tiff Macklem scope to make monetary policy a more forward-looking approach.
The bank is expected to open the door with more cuts, especially if the next inflation reading shows little signs of heat. The report arrived Tuesday, just the day before the interest rate decision. Consensus forecasts that August’s title inflation rate will rise to 2.0% from 1.7% in July, mainly due to the basic impact. However, because the monthly numbers are basically flat and the core measures are stable, the data will not hinder the BOC restart and slow down rate.
Fed expects mortgage rate response
The Fed also expects to lower interest rates this week, but in large part to bring policies closer to neutrality rather than addressing urgent economic weaknesses. Wage growth slowed in the U.S., but the 4.3% unemployment rate is still close to the Fed’s long-term estimate, with wage growth rejoining 4%. Reasons for back-to-back movement have been reduced.
But the market is already responding, with U.S. mortgage rates fell 15 basis points last week to 6.35%, the lowest in nearly a year, according to Freddie Mac. Fiscal yields also fell slightly below 4% for the first time since April, reflecting investors’ bets that the Fed will reduce more aggressively in the coming months.
In Canada, bond yields have also fallen, with the Canadian government accounting for 2.70% for the first time since May. This puts downward pressure on fixed mortgage rates, and now about five years of term is below 4% again. This shift has prompted many lenders, including Royal Bank of Canada, to cut tax rates.
The rise in market expectations
one Reuters Polls found last week that nearly 80% of economists expect Canadian banks to lower their interest rates by 25 basis points, and most also hope to cut them again by the end of the year. The market has already priced in Wednesday’s move, and the focus has shifted to the final development of the easing cycle.
For borrowers, this shift has translated into a modest improvement in interest costs. If the central bank delivers as expected, variable rate holders will pay monthly, while fixed rate borrowers will benefit from lower bond yields to be collateralized pricing.
Why do some people say that BOC should wait
Not all economists are convinced that Canadian banks should cut tax rates ahead of schedule.
Derek Holt, head of capital market economics at Scotiabank, said that despite growing cases and weaker economies, economic weakness has been strengthened, but the risk of action too quickly remains.
“The excess supply situation could cause the shift to inflation to fall by 2% at 2% without falling over time,” he wrote. “The high level of uncertainty surrounding forecasts and inflation risks deserves a high degree of caution in policy rates while retaining the actual possibility while preserving the actual possibility that temporary relief can be temporarily relieved before allies return.”
He warned that while the market provided Canadian banks with a “free pass”, central banks may not want to overuse it because any relief “can be temporary and then back.”
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Last modified: September 13, 2025
