Insights 
VT 
Out of 23 economists, 17 predict that the Bank of Canada (BoC) will cut rates at least twice more this year. However, the market currently anticipates just one rate cut.
The BoC has been aggressive with its rate cuts and implemented precautionary reductions due to trade tensions. Since last December, Canada’s underlying inflation rate has been increasing steadily.
Effects Of Inflation On Rate Cuts
The easing of trade war tensions and the bank’s aggressive monetary measures may continue to exert upward pressure on inflation. As a result, the market has ruled out a second rate cut, and if economic activity improves, further rate cut predictions may be dismissed.
A BoC rate hold is widely expected in the upcoming decision. Given recent inflation challenges, the central bank is expected to adopt a more hawkish stance.
What this means, in short, is that economists are still leaning toward at least two more reductions in Canada’s interest rates before the year’s out — yet the wider market doesn’t feel as confident. The central bank has already taken steps that, on the surface, would normally encourage consumer and business lending, aiming to pre-empt sluggish exports and external economic shocks. Nevertheless, the data on inflation complicates the matter.
Since last December, we’ve seen prices ticking up in a reasonably steady fashion. This is likely being fuelled by more stable global trading conditions, particularly now that protectionist actions have cooled. At the same time, previous rate cuts continue to work their way through the broader economy. Both of these factors could be making it harder for inflation to retreat in line with policy targets.
Because of this, those on the trading floor are left with a fairly narrow path for interpreting forward action. What we’ve observed is that short-term rate futures have already dismissed the idea of two rate cuts, pricing in instead a lower probability of further easing. Expectations have shifted. If growth data turns out stronger than forecast — or even simply fails to deteriorate — then the bets on additional accommodation could decay further.
As for the next policy decision itself, most anticipate that the benchmark rate will remain steady. Reading between the lines, the central bank appears to be resetting its tone subtly. After all, if inflation continues to overshoot targets, the possibility of a rate hike could even return to traders’ discussions, however improbable that might’ve seemed in the spring.
Implications For The Canadian Dollar
We should pay closer attention to forward guidance when it’s released. Central bankers, particularly Macklem and his colleagues, seem poised to push back gently against expectations of further easing, especially given they’ve already acted decisively this year. Statements post-announcement will matter more than usual. Any upward revision in the inflation outlook — or any remarks that imply patience — could shift terminal rate pricing quickly.
Rather than looking for clues in headline preferences or political noise, now’s the time to focus on the second-tier data points that the central bank has been leaning on to justify its decisions: wage growth, shelter costs, and service sector inflation. If these continue to firm, even modestly, they may challenge any dovish views left in positioning.
We’ll also want to track the reaction of the Canadian dollar. Currency moves often mirror interest rate trajectories, and a stronger loonie could be yet another reason for the bank to pause. Not because it fears strength, but because a firm currency naturally tightens financial conditions — something the bank has aimed to avoid, up to this point.
In terms of positioning, those holding rate-sensitive contracts should plan around limited immediate movement, but anticipate volatility around future inflation readings and speeches from bank officials. We need to remember that inflation surprises have tightened yield curves before, and could easily do so again.
So in the next several weeks, data releases must be watched more closely than usual. If the numbers show that rising prices are becoming embedded, we expect the tone in fixed income pricing to shift further away from rate cuts entirely.
