Central Banks to Resume Interest-Rate Cuts as Trade Disruptions Take Toll

Strategic Insights -

Trade disruptions are expected to prompt interest-rate cuts from both the Bank of Canada and the US Federal Reserve this week, after months of waiting to gauge the impact of US President Donald Trump's tariffs on the global economy. The two central banks have held off on easing cycles to date, despite inflation not taking off as much as feared, and a job market that effectively stalled over the summer. The anticipated rate cut is expected to inject life into dormant housing markets and boost stocks, but could also signal concern about an economic slowdown and carry political baggage for the Fed.

Key Takeaways:

  • The Bank of Canada and the US Federal Reserve are expected to resume interest-rate cuts this week due to trade disruptions.
  • The Fed has been on hold since December, while the BoC has held interest rates steady for the past three rate decisions.
  • Inflation has not taken off as much as feared in either country, while the job market on both sides of the border effectively stalled over the summer.
  • The anticipated rate cut is expected to inject life into dormant housing markets and boost stocks.
  • However, a dovish tilt from central bankers could also signal concern about an economic slowdown and carry political baggage for the Fed due to ongoing pressure from President Trump.
  • Eric Lascelles, chief economist for RBC Global Asset Management, expects multiple cuts from the Fed and potentially from the BoC, but notes that the BoC is less clear about its intentions.
  • Douglas Porter, chief economist at Bank of Montreal, expects a pivot by the BoC to provide another leg up for stocks, but notes that the BoC has been careful not to offer much guidance.
  • The BoC lowered interest rates seven consecutive times in 2024 and early 2025, while the Fed has only lowered interest rates three times over that period.
  • Traders are betting on five quarter-point cuts from the Fed over the next year, while only two cuts are expected from the BoC, including one this week.
  • The Fed will publish a new forecast on Wednesday, including a "dot-plot" which captures policy makers' expectations about future interest rates.

Statistics:

  • The Bank of Canada held interest rates steady for the past three rate decisions.
  • The Fed has been on hold since December.
  • Inflation has not taken off as much as feared in either country, with headline inflation in the US increasing to 2.9 percent in August.
  • The job market effectively stalled over the summer, with a significant deterioration in the US labour market.
  • The BoC lowered interest rates seven consecutive times in 2024 and early 2025, bringing its policy rate to 2.75 percent from a peak of 5 percent.
  • The Fed has only lowered interest rates three times over that period, with the target range for the federal funds rate remaining between 4.25 percent and 4.5 percent.
  • Traders are betting on five quarter-point cuts from the Fed over the next year.
  • Only two cuts are expected from the BoC, including one this week.

Sources:

  • "Bank of Canada and US Federal Reserve to Resume Interest-Rate Cuts this Week". Financial Post.
  • "Canada's Economy Shrinks 1.6 Percent as US Trade Tensions Bite". Bloomberg.
  • "US Inflation Rate Rises in August, Boosting Hopes for Interest Rate Cut". Reuters.
  • "Bank of Canada Keeps Interest Rates Steady, but Cautions on Inflation". Globe and Mail.
  • "US Federal Reserve Cuts Interest Rates 25 Basis Points as Expected". The New York Times.