By Erik Hertzberg
(Bloomberg) — The Bank of Canada is likely to cut interest rates to help an economy that’s suffering more damage from U.S. tariffs, even as Prime Minister Mark Carney finalizes plans for a stimulative budget to boost growth.
Markets and economists expect officials led by Governor Tiff Macklem to lower the benchmark overnight rate by 25 basis points for a second consecutive meeting on Wednesday, bringing the policy rate to 2.25%, the lowest since July 2022.
As of Tuesday morning, traders in overnight index swaps were pricing in a greater than 80% chance of a cut.
Canada’s economy is still reeling from the trade dispute with the U.S., which has slammed the country’s exporters and inflamed uncertainty for businesses. Last week, U.S. President Donald Trump threatened to increase taxes on Canadian products yet again after he became annoyed with an Ontario government television advertisement that used the words of Ronald Reagan to criticize tariffs.
The most recent consumer price figures weren’t great: inflation accelerated to 2.4% in September and core measures were tracking above 3%. So another rate reduction would signal just how worried policy-makers are about the downside risks for growth.
“As much as the bank is still cautious on inflation and officials’ acknowledgment that they can only help the economy transition, this is still a big demand shock,” Veronica Clark, an economist at Citigroup Inc., said by email.
As for the government’s Nov. 4 budget, which will increase spending, it’s not going to be enough to offset weakness in the private sector, Clark said.
Speaking to reporters in Washington this month, Macklem called Canada’s labour market “soft” despite a strong September jobs report. He pointed to the 7.1% unemployment rate and suggested that economic growth of about 1% in the near term won’t be enough to close the output gap. Officials have also downplayed the bank’s so-called preferred measures of inflation.
“Communications have been quite dovish during the inter-meeting period, which is the reason why market pricing has increased despite a stock of data surprises that has turned quite positive,” said Ian Pollick, global head of fixed income, commodities and currency strategy at Canadian Imperial Bank of Commerce.
That dovishness is based, in part, on the sour mood of business executives. The central bank’s survey of firms showed expectations for weaker demand over the next year. Non-residential business investment contracted at a 10.1% annualized rate in the second quarter. Pessimism is mounting, and Stellantis NV and General Motors Co. have created doubt about 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. That will lead to a wider federal deficit. Economists surveyed by Bloomberg expect Canada’s fiscal shortfall to surge to $70 billion, and some see the deficit rising to $100 billion, which would be more than 3% of gross domestic product.
“The ongoing manufacturing recession will not end because Ottawa is aiming to boost investment,” Fred Demers, head strategist of multi-asset solutions for BMO Global Asset Management, said by email. “The budget will help offset some of the pain, but there is still plenty of pain for Canada into 2026.”
Central bank officials have repeatedly said fiscal policy is the best way to respond to the trade war. Monetary policy can help, but it’s a blunter tool.
In any event, the Bank of Canada won’t be able to factor in the details of the budget until its December rate decision.
The central bank on Wednesday will also publish its usual suite of projections for growth and inflation for the first time since January in its Monetary Policy Report. Since April, the bank has offered analysis of potential economic outcomes — but tariffs made “point forecasts” too difficult.
A quarter percentage point cut this week would bring the overnight rate to the bottom of the bank’s estimated range for the neutral rate of interest, where borrowing costs theoretically neither stimulate nor restrict growth.
With the federal government also set to offer guidance on debt issuance and duration next week, the central bank may also opt to update plans on how it will manage its balance sheet. In January, it said it would resume purchases of treasury bills in the last three months of this year.
The U.S. Federal Reserve is also expected to cut borrowing costs on Wednesday.
–With assistance from Mario Baker Ramirez.
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Last modified: October 28, 2025