The Bank of Canada (BoC) is expected to deliver another 25-basis-point rate cut at its upcoming meeting on October 29, 2025, bringing the benchmark interest rate down to 2.25%. Despite recent stronger-than-expected employment and inflation data, analysts suggest that the Canadian economic outlook remains too weak for policymakers to pause the easing cycle.
Persistent trade-related uncertainty, slowing business confidence, and signs of weakening job creation continue to weigh on the economy, leading markets and experts to forecast additional policy easing in early 2026.
Sticky Dovish Pricing Despite Strong Data
Recent data has given mixed signals about the health of Canada’s economy. September’s employment report showed 60,000 new jobs, keeping unemployment steady at 7.1%, while inflation climbed higher than anticipated to 2.4%. Core measures of inflation—median and trim—also rose above 3.0%, reflecting ongoing price pressures.
However, the market reaction has remained dovish. Futures markets are pricing in approximately 21 basis points of rate cuts for October, signaling strong expectations that the BoC will prioritize economic stability over inflation control. Analysts widely anticipate a 25bp cut, consistent with the central bank’s cautious stance on growth.
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Business Confidence and Investment Outlook Remain Weak
The Bank of Canada’s third-quarter Business Outlook Survey—a crucial input into policy decisions—revealed growing pessimism among Canadian firms. While business sentiment improved slightly from the previous quarter, trade-related uncertainty continues to hinder both capital investment and hiring plans.
The “future sales” indicator fell into negative territory for the first time in 2025, showing more firms expect lower sales ahead. The number of businesses reporting deteriorating sales expectations is at its highest since the pandemic.
Employment data further highlights the fragile situation. According to the survey:
- 63% of firms expect their workforce levels to remain the same or decline.
- Only a minority foresee significant job growth in the coming quarters.
- Historically, similar business outlook data coincided with unemployment rates between 7.3% and 7.9%, indicating the risk of a further rise from current levels.
Inflation Uptick Seen as Temporary
Although inflation came in stronger than expected, the Bank of Canada is unlikely to interpret this as a sustained trend. The survey data shows many firms face weak demand and cannot easily pass higher costs on to consumers.
Wage growth expectations for the next 12 months have fallen to 3.1%, down from the 3.6% pace recorded earlier in 2025. This decline signals easing pressure on household incomes and consumer demand.
Combined with slower shelter cost inflation, similar to patterns seen in the United States, the BoC still projects inflation will average around 2% over 2026–2027. This gives policymakers room to proceed with a rate cut without fearing runaway inflation.
Communication Has Remained Dovish
The BoC’s recent communication has reinforced its dovish stance. Governor Tiff Macklem’s speech on October 17 emphasized the risks of soft hiring, particularly in sectors exposed to global trade tensions. Even with a temporary rise in job creation, the BoC continues to view Canada’s labour market as fragile.
The September policy statement highlighted risks to both growth and employment, citing uncertainty surrounding USMCA renegotiations as a major factor. Although diplomatic relations between Canada and the United States have remained stable, there has been little concrete progress on trade reform, prolonging investor uncertainty.
The Challenge of Signaling an End to Easing
While October’s statement may sound slightly more optimistic than September’s, the BoC is unlikely to declare the end of its rate-cutting cycle. Trade risks remain high, business confidence is low, and the global economic environment remains volatile.
Allowing markets to anticipate further rate cuts could, in fact, support the Bank’s goals—by weakening the Canadian dollar (CAD) and loosening financial conditions, which would benefit exporters and investment-driven growth.
Analysts expect the BoC to pause in December 2025, before delivering another 25bp cut in January 2026, taking the policy rate down to 2.0%. This would align with the BoC’s historical trend of maintaining negative real policy rates during periods of high unemployment and modest inflation.
Historical Context: Negative Real Rates in Canada
Historically, Canada’s real policy rates—the benchmark interest rate adjusted for inflation—have often turned negative during periods of economic weakness.
When unemployment was last around 7.1%, real policy rates averaged -1.5%. By contrast, the current real policy rate sits at roughly +0.35% versus headline inflation and -0.45% versus core inflation, leaving room for additional easing without breaking from precedent.
This reinforces the view that the BoC has flexibility to cut rates further if economic conditions fail to improve over the next few months.
CAD Outlook: Vulnerable Against Most G10 Currencies
Despite performing relatively well against weaker currencies like the euro and pound, the Canadian dollar (CAD) remains vulnerable in broader currency markets.
The USD/CAD exchange rate is currently about 2.5% overvalued compared to short-term fair value. Analysts project a gradual decline to 1.38 by the end of 2025, largely driven by expected U.S. dollar weakness. However, if the BoC delivers further rate cuts while the U.S. Federal Reserve holds steady, the loonie could briefly weaken to 1.41 before stabilizing.
In short, CAD may face ongoing headwinds as global investors continue to favor higher-yielding assets and safer currencies amid uncertainty.
Outlook for 2026
Looking ahead, the BoC’s monetary policy direction will depend heavily on:
- Trade policy developments under USMCA.
- Labour market resilience in the face of slowing global demand.
- Inflation trends and consumer spending patterns.
If inflation continues to moderate while unemployment rises, the Bank may continue easing into 2026. On the other hand, a rebound in growth or unexpected inflation pressure could push policymakers toward a longer pause.
The Bank of Canada’s expected 25bp rate cut on October 29, 2025, marks another step in its cautious approach to supporting the economy amid global trade uncertainty and soft domestic activity.
Even as inflation and jobs data show short-term strength, the broader economic picture suggests continued fragility. The BoC is likely to maintain a dovish bias, keeping the door open to further cuts in early 2026.
For Canadian households, businesses, and investors, the message is clear: monetary policy will remain accommodative, but the Canadian dollar’s vulnerability is set to persist as markets brace for prolonged easing.