The Bank of Canada will likely cut rates next month and again in September, while the U.S. Federal Reserve will remain on hold until the fourth quarter, says CIBC World Markets Inc. in its latest economic forecast.
Amid higher tariffs and elevated uncertainty, the economic growth outlook is worsening.
“Our global growth forecast has been downgraded as a result, postponing the pick-up that as of last year we were expecting to see in 2025,” the bank’s economists said in a new report.
Against that backdrop, fiscal and monetary policymakers “will therefore have to pull some levers to deliver the improved growth we’re expecting for 2026,” it said.
However, the diverging performance of the U.S. and Canadian economies this year will lead to diverging monetary policies too, the report noted.
Currently, the divergence is most acute in the labour market, the report said — where the U.S. remains near full employment, whereas Canada is “already roughly a percentage point from where full employment lies,” with the jobless rate expected to climb higher.
As a result, rate cuts in Canada will likely come earlier than markets are currently expecting, the report suggested.
“The Bank of Canada, facing a much weaker job market, doesn’t have the luxury of a long pause,” it said. “We look for a quarter-point Bank of Canada rate cut in both July and September to be the final leg of this easing cycle, as long as the U.S. doesn’t accelerate the trade war and prompt a full-blown global recession.”
In the U.S., CIBC now expects just one rate cut this year — and not until the fourth quarter — down from its previous expectation of two cuts.
“Simply put, Chairman [Jerome] Powell is in no rush to act with inflation at risk of heading higher again, and the Fed’s full employment mandate not yet being in jeopardy,” the report said.
Looking to next year, the Fed may be able to cut rates by another 75 basis points.
“But even that degree of easing could be put in doubt by fiscal policy decisions that are still a work in progress,” it added.
Looking ahead to next year, the Canadian economy is expected to recover its upward momentum.
“Fiscal stimulus from both the federal and provincial governments will help, but to really stoke the fire we also need to see continued progress in trade negotiations and further interest rate cuts from the Bank of Canada,” the report said.