Bank of Canada expected to cut rates twice more in 2025, survey shows

Financial markets expect the Bank of Canada to lower its policy interest rate to 2.25% by the end of 2025 and hold it there through 2026, according to the central bank’s second-quarter Market Participants Survey released Monday.

The quarterly survey, conducted from June 25 to July 3 among about 30 financial market participants, was completed before the Bank of Canada’s July 30 decision to maintain its overnight rate at 2.75% for the third consecutive meeting. Policymakers cited trade uncertainty, stronger-than-expected economic resilience and persistent underlying inflation – with core measures steady near 3% since April – for keeping rates unchanged.

Median survey responses pointed to a gradual easing path: 2.50% in September, 2.25% by December, and no further changes through 2026. The first rate hike since 2023 is expected in the third quarter of 2027. Participants’ median estimate for Canada’s nominal neutral rate stood at 2.75%.

“If a weakening economy puts further downward pressure on inflation and the upward price pressures from trade disruptions are contained, there may be a need for a reduction in the policy interest rate,” governor Tiff Macklem said on July 30.

Respondents forecast median GDP growth of 0.8% for 2025 and 1.8% in 2026, with a 35% probability of recession in the next six months. About 84.6% judged the economy to be operating below potential, and 89% flagged rising trade tensions as the top downside risk. Weaker consumer spending and a softer housing market were each cited by 44%. On the upside, easing trade tensions and larger-than-expected fiscal stimulus were most frequently identified, each by 89% of respondents.

Median expectations for headline CPI inflation were 2.2% at the end of 2025 and 2.0% in 2026. Respondents assigned a 45.5% probability to inflation being in the 2.01%–3.00% range next year, with only a 1.8% chance of it exceeding 4%.

The survey followed weaker-than-expected jobs data for July, when Statistics Canada reported a net loss of 41,000 positions, the largest drop since January 2022. Economists at BMO, CIBC and National Bank said the data support the case for rate cuts later this year, though the September 17 decision will also depend on upcoming inflation readings and GDP figures.

CMP

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