Bank of Canada: It’s the Least They Can Do

Monetary policymakers won’t be lowering interest rates next week, but they could still offer a milder form of support for Canadians. Inflation looks far from threatening. Across a range of measures, underlying price growth appears tame. After adjusting for known biases in the Bank of Canada’s preferred core inflation metrics, our analysis suggests underlying inflation is only marginally above 2%.

From a strictly data-driven perspective, there is little reason for the Bank of Canada to sound hawkish on inflation. Yet, in the absence of clear evidence, policymakers have continued to bake in assumptions of future price pressures stemming from businesses reorienting supply chains and seeking new export markets. As we have noted before, that hypothesis has not been borne out in the data.

Now, as storm clouds begin to gather once again over the global economy, central bankers should worry less about theoretical upside inflation risks and more about the economy’s current condition. Fewer than 50% of industries have posted positive payroll growth over the past twelve months—a pattern rarely observed outside of recessions. At the same time, there has been a notable spike in the share of individuals reporting they are likely to miss a debt payment within the next three months.

Housing markets continue to soften across most of the country. Prices are declining, inventories are rising, and while affordability has improved modestly, confidence remains fragile. Fewer than 15% of renters plan to purchase a home over the next twelve months, the smallest share since data collection began in 2020.

Businesses are faring somewhat better. Profit margins are finally ticking higher, but firms remain hesitant to commit to new investment or expand payrolls. With CEOs largely in wait‑and‑see mode ahead of the upcoming CUSMA review, uncertainty is reinforcing a vicious cycle—one where households grow increasingly concerned about job security.

To be sure, Budget 2025 outlined a sizable increase in fiscal stimulus. However, that support is unlikely to meaningfully boost activity until late 2026 or early 2027. Population growth should also re-emerge next year, and mortgage renewals will start providing a tailwind to the economy too. But the risk in the near term is that the economy hits an air pocket.

The Bank of Canada’s Governing Council will reiterate that the current policy rate is low enough to bring the economy back to full health—assuming everything goes according to plan. But policymakers should begin to soften their rhetoric on inflation and more openly discuss the downside risks that would spur them back into action. Even if rate cuts aren’t in the offing any time soon, a dovish tone in next week’s communiqué could help lower borrowing rates. It’s the least they can do given the current situation.