Canada’s Rate Cut Conundrum: Will the BoC Ease Despite Inflation?

Canada’s economic landscape in late 2025 presents a complex challenge for the Bank of Canada (BoC). The central bank is under pressure to stimulate a slowing economy, but recent inflation data is complicating the decision-making process. Will the BoC proceed with further interest rate cuts, or will it hold steady to combat rising prices? This is Canada’s rate cut conundrum.

The Case for Cutting Rates

Several factors support the argument for the BoC to continue its easing cycle.

Economic Slowdown: Canada’s economy experienced a contraction in the second quarter of 2025, with a 1.6% decline in GDP. [2, 4] This contraction was largely driven by weaker exports and a decline in investment. [2, 5] While a modest rebound occurred in July, the overall economic outlook remains subdued. [5]
Trade Tensions: Trade tensions with the U.S., particularly regarding steel and automobiles, have weighed on exports and business investment. [4] The uncertainty surrounding the Canada-United States-Mexico Agreement (CUSMA) review adds further pressure. [17, 18] Tariffs are weakening the Canadian economy and increasing trade friction. [17, 18]
Fragile Labor Market: The Canadian labor market shows signs of weakening. The last two job reports indicated declines in net employment, leading to increased unemployment and pressure on wage growth. [2] Although there was a surprise gain of roughly 60,000 jobs in September, the labor market has barely posted any job growth since January. [12, 29]
Global Economic Concerns: A slowing U.S. economy, Canada’s largest trading partner, could drag down the Canadian economy. [16] Concerns about global economic stability may also lead investors to flock to safer assets, reducing demand for the Canadian dollar. [16]

In response to these concerns, the Bank of Canada already lowered its overnight rate by 25 basis points to 2.5% in September 2025. [2, 12] At the time, Governor Tiff Macklem stated that the central bank had shifted to worrying more about a slowing economy than high inflation. [17, 18]

The Inflation Obstacle

Despite the economic headwinds, the BoC faces a significant challenge: rising inflation.

Inflation Above Target: The annual inflation rate in Canada rose to 2.4% in September 2025, exceeding market expectations and marking the highest inflation rate since February. [3, 8] This was the first time in six months that inflation crossed the Bank of Canada’s 2% target. [3]
Core Inflation Concerns: The BoC’s preferred measures of core inflation, which strip away volatile sectors like gas, remain above 3%. [10, 12] These measures indicate persistent underlying price pressures in the economy.
Grocery Price Increases: Shoppers are paying more for groceries, with prices climbing 4% in September compared to the same period last year. [10] This increase is largely driven by pricier fresh vegetables and sugary goods. [10]
Gasoline Prices: While gasoline prices have fallen compared to last year, the rate of decline has slowed. [8, 10] This smaller drop in gasoline prices contributed to the overall increase in inflation.

The rise in inflation complicates the BoC’s decision-making process. Cutting rates further could stimulate the economy but also risk fueling inflation, potentially leading to a destabilized economy.

Expert Opinions and Forecasts

Economists are divided on whether the BoC will cut rates further in the face of rising inflation.

Rate Cut Expected: Many economists still expect the Bank of Canada to deliver a rate cut. [12, 28, 29] They argue that underlying inflationary pressures remain contained and that the economy needs stimulus to combat trade uncertainty and sluggish growth. [28] Some economists predict the BoC will cut its policy rate to 2.25% by the end of 2025. [11]
Hold or Delay: Other economists believe the recent inflation data makes a rate cut less certain. [12, 28] They suggest the BoC may choose to hold rates steady or delay further cuts until there is more clarity on the inflation outlook. [12, 28]
BMO Economics: BMO chief economist Doug Porter suggests that the September inflation report “did make it a little tougher to cut rates,” but he is putting more stock in the broader economic context to inform BMO’s rate call for a cut. [12, 29]
RBC Economics: RBC Economics expects one more cut, which would leave the overnight rate at 2.25%, the lower end of the BoC’s neutral range. [28]

Potential Impacts of a Rate Cut

Further interest rate cuts could have several impacts on the Canadian economy.

Weakening Canadian Dollar: A widening gap between Canadian and U.S. interest rates could lead to a weaker Canadian dollar. [23] A weaker loonie would increase the cost of imports. [23]
Mortgage Rates: Variable and adjustable mortgages could become more attractive if the BoC cuts interest rates. [21] Fixed mortgage rates could also fall if Canadian bond yields decline due to the U.S. rate cut. [21]
Economic Stimulus: Lower interest rates could stimulate economic growth by encouraging borrowing and investment. [24] This could help offset the negative impacts of trade tensions and a slowing global economy.

The Bottom Line

The Bank of Canada faces a difficult decision. While the Canadian economy needs stimulus, rising inflation is a major concern. The BoC will need to carefully weigh these competing factors when making its next interest rate decision. The central bank has signaled it will return to publishing a single, central forecast for the economy. [12]

The outcome will depend on the BoC’s assessment of the underlying inflationary pressures, the strength of the Canadian economy, and the potential impacts of further rate cuts. The next interest rate announcement is scheduled for October 29, 2025, where the Bank of Canada will reveal its decision. [9, 13]

Disclaimer: This is not financial advice. Consult with a financial professional before making any investment decisions.