While there may not be a case for the Bank of Canada to cut rates, given the rising geopolitical uncertainty and wobbly job markets, it should at least soften its tone at next week’s policy meeting, says Desjardins Group.
In a research note published Friday, the firm’s economists argued for the central bank to scale back its hawkish tone on inflation, providing some philosophical support for lower borrowing costs, without actually cutting rates.
“Inflation looks far from threatening. Across a range of measures, underlying price growth appears tame,” they wrote in the report — adding that they estimate that underlying inflation is only slightly above the key 2% level.
Yet, the report noted that central bankers have continued to express concerns about the prospect of inflation picking up, as supply chains are rejigged, and businesses aim to break into new export markets.
“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,” it said.
While corporate profit margins are growing, firms are hesitant to invest or to add workers in the current climate, the report noted.
“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,” it said.
Over the past 12 months, payrolls have grown in less than half of industries, which the report said is “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,” it noted.
And, in much of the country, housing markets are weakening.
“Prices are declining, inventories are rising, and while affordability has improved modestly, confidence remains fragile,” the report said.
While the latest federal budget promised fiscal stimulus, that’s not expected to hit until late 2026, or early 2027, the report said — and “the risk in the near term is that the economy hits an air pocket.”
In the face of that threat, Desjardins argued that “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,” the report said.