The Bank of Canada (BoC) will kick off a busy week of G10 central bank meetings later today. Markets are largely convinced that the BoC will deliver another 25-basis-point rate cut, with expectations currently standing at roughly 80%, according to Commerzbank.
However, the bank’s analysts remain less certain, arguing that the December policy meeting might be a more suitable time for further easing.
Inflation and Labour Data Complicate the Outlook
Commerzbank commodity analyst Carsten Fritsch noted that while Canadian inflation remains within the BoC’s target range, it recently surprised to the upside. The headline CPI came in 0.2 percentage points above forecasts, while core inflation also ticked higher.
“With the key interest rate at 2.5% and headline inflation at 2.4% year-on-year, another rate cut would push policy deeper into expansionary territory,” Fritsch explained.
The labour market, meanwhile, has shown signs of cooling but remains volatile. BoC Governor Tiff Macklem recently described the strong September job growth as an “outlier,” a view Commerzbank shares.
Fritsch added that cutting rates at a time when both inflation and employment exceeded expectations would risk sending an overly dovish signal to markets.
Trade Uncertainty Adds to the Dilemma
Recent U.S. tariff increases, including a 10-percentage-point hike, have introduced new uncertainty for Canada’s export outlook. While it remains unclear which goods will be affected, Commerzbank believes this adds weight to a cautious, wait-and-see approach from the central bank.
December Cut More Likely
Commerzbank maintains that another BoC rate cut is still likely before year-end, but sees December as the more logical timing.
“By then, policymakers will have more clarity on whether September’s strong data were an outlier and how trade relations with the U.S. evolve,” the bank said.
This view contrasts with market consensus, as nearly three-quarters of economists surveyed by Bloomberg expect a cut today. If the BoC holds rates steady, Commerzbank expects the Canadian Dollar (CAD) to gain modestly in the short term, even though medium-term fundamentals remain weak.
