TD Sees Rate Cuts as the More Likely Next Move for the Bank of Canada

Despite ongoing economic uncertainty, TD Economics believes the Bank of Canada is more likely to ease interest rates in the future than raise them, if and when it decides to move off its current stance.

At present, the Canadian economy is navigating a complicated mix of forces. Growth has been uneven but relatively resilient, inflation has cooled from its peak but remains sensitive to external shocks, and households continue to adjust to higher borrowing costs after years of volatility.

TD’s view is that while risks remain on both sides, the underlying economic backdrop does not strongly support further tightening. Instead, conditions appear to favour eventual easing if the Bank shifts direction.

A fragile but resilient economy

Canada has absorbed a series of shocks in recent years, including pandemic-era distortions, aggressive rate hikes to control inflation, renewed trade uncertainty, and geopolitical pressures that have pushed energy prices higher.

Even so, economic activity has held up better than many expected. Consumer spending has remained steady, employment trends have been relatively stable overall, and parts of the resource sector have helped offset weakness elsewhere.

That resilience is a key reason TD does not see an urgent need for tighter monetary policy.

Inflation risks remain, but are more contained

Inflation remains one of the Bank of Canada’s central concerns, especially given how quickly price pressures can re-emerge through energy markets or supply disruptions. However, TD’s outlook suggests inflation pressures are more episodic than structural at this stage.

In this view, recent inflation spikes are largely driven by specific supply-side shocks rather than broad-based demand overheating. That distinction matters because it reduces the case for sustained higher interest rates.

The policy outlook: more room to cut than hike

TD economists argue that if the Bank of Canada does adjust policy from here, the balance of risks leans toward rate cuts rather than hikes.

The reasoning is straightforward: growth is expected to remain modest, inflation is closer to target than in previous years, and financial conditions are already restrictive enough to keep demand contained.

While near-term policy decisions may remain cautious and data-dependent, the broader trajectory, in TD’s view, points toward easing rather than further tightening.

Bottom line

The Bank of Canada is still in a holding pattern, watching how inflation, growth, and global risks evolve. But according to TD Economics, the bigger picture suggests that the next meaningful policy move—whenever it comes—is more likely to be a rate cut than another increase