Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 20
THE DRUMMER'S EAR | RHYTHMIC REASONING
deliver more cuts, the BoC may find some flexibility to adjust its
own policy stance without the concern of widening interest rate
differentials.
Fig. 2: Excluding trade effects, the
domestic economy has held up well
Final domestic demand (QoQ SAAR)
10%
8%
6%
3.5%
4%
2%
0%
Beyond this year, we think that ongoing inflation headwinds could
cause the BoC to reverse course and retrace its last two cuts,
bringing the overnight rate back up to 2.75% by 2026-end from
the 2.25% we expect it to be at the end of 2025. Indeed, in August,
the BoC’s trim and median inflation measures averaged 3.05% YoY.
The month-over-month annualized rate of that average is hovering
around 2.5%, within the BoC’s inflation control range but above the
2% target (Fig. 4).
Fig. 4: Inflation headwinds have yet to be fully defused
-2%
4Q20
3Q21
2Q22
1Q23
4Q23
3Q24
2Q25
9%
BANK OF CANADA RESUMES POLICY RATE CUTS
Strong domestic conditions were not enough for the Bank of
Canada (BoC) to fade the latest GDP reading. The Governing
Council’s attention was also fixated on the recent rough patch
of soft jobs data, prompting them to slash the overnight rate by
25 bps in September after three consecutive holds. Indeed, the
economy has shed jobs for two consecutive months, bringing the
average monthly job gain for 2025 down to 4.7k through August
versus 24k through June. Consequently, the unemployment
rate has continued to climb steadily, up 0.4 percentage points
from 2024-end (Fig. 3). Cooling labour demand has been met
by a moderation on the supply side amid factors like tighter
immigration policies and long-term structural forces like ageing
demographics.
Fig. 3: Canada’s labour market has
hit a rough patch in recent months
120
8%
80
40
6%
0
-40
-80
4%
2022
2023
Net employment chg (000s) - LHS
2024
2025
Unemployment rate - RHS
Source: Statistics Canada, Bloomberg Finance LP, Scotia Wealth Management
Notably, the BoC’s September statement omitted phrasing that
said further policy rate cuts may be appropriate. The omission
could suggest that the Bank does not want to commit to a
particular rate path and remain highly data dependent. Our
forecasts are calling for one more 25 bps reduction in the overnight
rate at one of the BoC’s final two meetings of the year. Given that
the Fed has resumed its policy easing cycle and is expected to
MoM % chg (annualized)
Source: Statistics Canada, Scotia Wealth Management
6%
3%
0%
2021
2022
Average of BoC's core CPI measures
2023
2024
3-mth moving average
2025
2% target
Source: Statistics Canada, Bloomberg Finance LP
USMCA NEGOTIATIONS WILL BE A FOCUS IN 2026
As it stands at the time of this writing, the U.S. has imposed
a daunting 35% tariff on most Canadian goods, with the main
exceptions being energy and potash (10%), steel, aluminum, and
copper (50%), and autos (25%).
At the same time, the White House has mostly respected the terms
of the USMCA, exempting goods that comply with the agreement.
As such, the average tariff rate on Canadian products is among
the lowest in the world. There are exceptions to this, however, with
Trump recently announcing 10% tariffs on imported timber and
lumber and 25% duties on kitchen cabinets and vanities. A senior
Canadian government official noted that there are no USMCA
carve-outs for these goods.
While Canada is in a better position relative to many other
countries, the unpredictability of White House policy could keep
uncertainty elevated, dampening investment and hiring intentions.
A slowing U.S. economy caused by higher tariffs on other trading
partners could also indirectly affect demand for Canadian exports.
Then there is the upcoming USMCA review slated for mid-2026. We
have summarized the possible outcomes in broad strokes below:
Best case: All three countries agree to extend the USMCA for
another 16 years. For Canada, this creates stability and boosts
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