RBC expects Bank of Canada to cut rates in October

The Royal Bank of Canada (RBC) has projected that the Bank of Canada (BoC) will deliver another 25 basis point rate cut in October, following its September move to restart the easing cycle.

The central bank’s decision to resume cuts after a six-month pause was driven by softening in the labour market, sluggish gross domestic product growth, and a slowdown in core inflation, according to Claire Fan, senior economist at RBC.

Fan said the BoC’s September cut was also motivated by clear signs of cooling in the Canadian economy, pointing to rising unemployment and a deceleration in population growth as key factors.

"Without a significant pick-up in either labour or inflation data, we expect the BoC will follow with another 25 bps cut in October," Fan said.

Canada’s labour market surprised in September, adding 60,400 jobs while the jobless rate stayed at 7.1%, Statistics Canada reported. Most of September’s employment gains were in payroll jobs, with the public sector adding 31,000 positions and the private sector 22,000.

Scotiabank’s Derek Holt provided a counterpoint, suggesting that a rate hold later this month was “more probable,” but not guaranteed.

“The central bank’s October 29 decision is still live,” Holt said, referencing a surprisingly strong September jobs report.

“We still need to see CPI on October 21st and the BoC’s quarterly surveys the day before, but at this point the odds of skipping the meeting have gone up.”

Holt also flagged concerns about the reliability of the latest jobs data, noting that “if last year’s seasonal adjustment factor had been used, job gains would have been closer to 20,000, just a third of the reported figure.”

Broader economic challenges have complicated the BoC’s outlook. United States Section 232 tariffs on Canadian exports—including softwood lumber and kitchen cabinets—are set to take effect October 14, with further threats looming over other sectors.

While most Canadian exports remain protected under the CUSMA exemption, targeted industries are expected to feel the pinch. “Preserving Canada’s CUSMA tariff exemption remains critical for the near-term outlook,” Fan said.

Despite these headwinds, RBC expects the Canadian economy to return to modest growth in Q3, with GDP forecast to rise at an annualized 0.5%. The federal budget update in November is anticipated to include larger deficits, which could provide some offsetting support through increased government spending.

Source: Canadian Mortgage Professional