Eric Herzberg
(Bloomberg) — The Bank of Canada is likely to cut interest rates to help an economy suffering more damage from U.S. tariffs, even as Prime Minister Mark Carney finalizes a stimulus budget plan to boost economic growth.
Markets and economists expect officials led by Governor Tiff Macklem to cut the benchmark overnight rate by 25 basis points at their second consecutive meeting on Wednesday, taking the policy rate to 2.25%, the lowest level since July 2022.
As of Tuesday morning, overnight index swap traders were pricing in a more than 80% chance of a rate cut.
Canada’s economy remains reeling from the trade dispute with the United States, which has hit the country’s exporters hard and heightened uncertainty for businesses. Last week, U.S. President Donald Trump, angered by an Ontario government TV ad that used Ronald Reagan’s rhetoric criticizing tariffs, renewed his threat to raise taxes on Canadian products.
Recent consumer price data has not been encouraging: Inflation accelerated to 2.4% in September, while core indicators topped 3%. Therefore, another interest rate cut would indicate the extent to which policymakers are concerned about downside risks to economic growth.
“While central banks remain cautious about inflation and officials acknowledge they can only help transition the economy, this is still a huge demand shock,” Citigroup economist Veronica Clark said in an email.
Clark said that as for the government’s November 4 budget, there will be increased spending, but this will not be enough to offset the weakness in the private sector.
Speaking to reporters in Washington this month, McCallum said Canada’s labor market was “soft” despite the strong September jobs report. He pointed to the 7.1% unemployment rate and suggested that economic growth of about 1% would not be enough to close the output gap in the short term. Officials also played down the central bank’s so-called preferred inflation measure.
“Communications during the meeting were quite dovish, which is why the market is pricing in gains despite a lot of surprising data that turned quite positive,” said Ian Pollick, global head of fixed income, commodities and currency strategy at Canadian Imperial Bank of Commerce.
This dovish attitude is partly based on bad mood among corporate executives. A central bank survey of businesses showed demand is expected to weaken next year. Nonresidential commercial investment contracted at an annual rate of 10.1% in the second quarter. Pessimism is growing, with Stellantis NV and General Motors Co. casting doubt on the future of two Ontario auto plants.
Carney’s government has pledged to take steps to improve infrastructure, housing, the military and business competitiveness in next week’s budget. This will cause the federal deficit to expand. Economists surveyed by Bloomberg expect Canada’s fiscal deficit to soar to $70 billion, with some predicting the deficit will rise to $100 billion, accounting for more than 3% of gross domestic product.
“The ongoing manufacturing recession will not end as Ottawa aims to increase investment,” Fred Demers, chief strategist for multi-asset solutions at BMO Global Asset Management, said in an email. “The budget will help offset some of the pain, but Canada still faces a lot of pain into 2026.”
Central bank officials have repeatedly said that fiscal policy is the best way to deal with the trade war. Monetary policy can help, but it is a dull tool.
Regardless, the Bank of Canada won’t be able to consider the details of the budget until its December interest rate decision.
The central bank will also publish its first consistent forecasts for growth and inflation since January in its monetary policy report on Wednesday. The bank has provided analysis of potential economic outcomes since April, but tariffs have made “point forecasts” too difficult.
A quarter-percentage-point cut this week would take overnight rates to the bottom of the bank’s estimated range for the neutral rate, where borrowing costs theoretically would neither stimulate nor constrain economic growth.
The central bank may also choose to update its plans on how to manage its balance sheet, as the federal government is also due to provide guidance next week on debt issuance and maturities. In January, it said it would resume buying Treasury bonds in the final three months of the year.
The Federal Reserve is also expected to cut borrowing costs on Wednesday.
—With help from Mario Baker Ramirez.
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Last modified: October 28, 2025
