Banking Sector Pondering Interest Rate Reduction Amid Economy's Cooling Inflation Rates
The Bank of Canada is weighing the possibility of interest rate cuts, as the Canadian economy shows signs of softening and inflation pressures appear to be easing.
In July, the nation's inflation rate declined to 1.7%, lower than the expected 1.8%. This downward trend is attributed to carbon taxes coming off, causing downward pressure on headline inflation.
Core inflation measures, which exclude volatile items such as food and energy, were expected to be 3.1%, but came in at 3 and 3.1%. Despite this, three-month annualized rates of core inflation are below 2.5%, indicating a stabilization in core goods prices with little evidence of broad tariff impacts.
The Bank of Canada's policy interest rate currently stands at 2.75%, situated in the neutral range between 2.25% to 3.25%. The bank does not consider itself pinned to any specific number for the neutral rate, and generally takes more than 25 basis points to bring rates into stimulative territory if they are at the neutral rate.
The bank has rate cuts in its forecast in both September and October. However, it will make its next decision after receiving one more CPI report for August.
The bank's concern lies in the persistence of inflation pressures. Despite the easing, the bank is cautious and wants to see more evidence that these pressures have been contained.
Persistence in underlying inflation is starting to fade, which could pave the way for rate cuts. If the bank does decide to ease, two rate cuts are more likely than one, according to recent speculation.
In July 2025, several members of the Bank of Canada's seven-member interest rate setting team expressed that they believed the bank had already provided all possible support with the current rate level. However, the bank also indicated that a rate cut could be possible in September if the economy was weakened by U.S. tariffs and inflation remained under control.
It is worth noting that the bank does not incorporate fiscal measures until they are officially tabled in a budget or an economic or fiscal statement. A budget is likely to arrive sometime around the second half of October or the first half of November.
In summary, the Bank of Canada is considering rate cuts due to the softer economy and the need to see more evidence that inflation pressures have been contained. The bank's next decision will be made after the August CPI report, and if the economy weakens and inflation remains under control, two rate cuts could be on the horizon.
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