Bank of Canada to Cut as Tariffs Hit Jobs Market: Decision Guide

cz}rn[g1n5]mf8u95h4xj9ke_media_dl_1.png Statistics Canada

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(Bloomberg) — The Bank of Canada is likely to resume cutting interest rates on Wednesday amid mounting evidence US tariffs are damaging the economy and labor market.

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Markets and economists expect policymakers led by Governor Tiff Macklem to cut the benchmark overnight rate 25 basis points to 2.5% on Wednesday, restarting monetary easing after holding borrowing costs steady for three consecutive meetings.

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During that period, the central bank spent much of its forecasting energy on the range of potential outcomes caused by the ever-changing tariff regime of President Donald Trump’s administration.

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A semblance of stability has now emerged, with Trump imposing 35% tariffs on Canadian goods that don’t comply with a continental trade deal as well as broad sectoral levies on steel, aluminum, autos and copper. Prime Minister Mark Carney is still pushing for relief from the sectoral tariffs and dropped much of Canada’s retaliation as an olive branch.

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It’s also clearer that Canada’s economy is reeling from the uncertainty and lost export activity. With growth stalled and the job picture worsening, the build-up of economic slack is now at risk of putting too much downward pressure on inflation.

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“All of the developments since July have erred on the side of demand weakening,” Veronica Clark, an economist with Citigroup Inc., said in an interview. “Cost pressures from tariffs and supply disruptions, if anything, are probably a bit lower.”

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Until now, borrowing costs have been bang on the mid-point of the central bank’s range for the neutral rate of interest, where they neither stimulate nor restrict growth. 

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But officials kept the door open for rate cuts if the economy slowed and inflation remained contained. Both of those conditions seem to have been met.

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Canada’s economy contracted at a 1.6% annualized rate in the second quarter and exports and business investment declined.

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The labor market has loosened further, and job losses are spreading beyond trade-related sectors, shedding over 106,000 jobs in the months of July in August. Manufacturing, retail and wholesale trade have been hit hard.

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The unemployment rate rose to 7.1%, up 40 basis points from a year ago. Though the bank doesn’t publish an estimate of the unemployment rate at which inflation remains stable — known as the non-accelerating inflation rate of unemployment or NAIRU — economists surveyed by Bloomberg say it’s about 6%.

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“The increase in the unemployment rate suggests the output gap is still widening, and the bank’s framework points to slowing inflation in the coming months and quarters,” Benjamin Reitzes, rates and macro strategist with Bank of Montreal, said by email.

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On a yearly basis, the consumer price index is rising near 2%, the bank’s target. But core measures, which strip out the more volatile price components, remain closer to 3%.